Positional trading is a trading style where investors hold positions for a long term, usually from a month to several years, in hopes of significant price movements for increased profits. This strategy is ideal for individuals who can withstand potential downturns and have the patience to wait for the price to reach their profit targets.
- Positional Trading Means
- How Does Position Trading Work?
- Positional Trading Vs Swing Trading
- Best Time Frame For Positional Trading
- Position Trading Strategy
- What Is Positional Trading- Quick Summary
- Positional Trading Means – FAQs
Positional Trading Means
Positional trading is an approach where investors maintain their positions for extended periods – typically from a month to several years – with the aim to profit from substantial price shifts. This method suits those who can tolerate potential market downswings and patiently wait for the price to meet their profit objectives.
For instance, if a trader anticipates Reliance Industries’ share price will rise due to favorable economic conditions and company-specific news, he may buy the stock. If he purchases the shares at INR 2000 each, his hope is that the stock price will increase significantly over several months or years, say to INR 3000 per share, resulting in a substantial profit.
How Does Position Trading Work?
Positional trading works by holding onto a position for a more extended period, usually a few months to years. Traders are less concerned about market fluctuations and more interested in long-term price movements.
Here are the steps usually involved in Positional Trading:
- Identify a Potential Trade: Positional traders use both fundamental and technical analysis to find potential trades. For instance, they might look for stocks with strong financials or an upcoming product launch that could positively affect the company’s value.
- Analyze the Market Conditions: Traders need to assess the overall market conditions. If the market is bearish, even the strongest stocks may not perform well.
- Enter the Trade: Once a potential trade is identified, the trader will enter the trade at a suitable price point.
- Monitor the Position: Although positional trading involves holding onto a position for a long time, monitoring the market conditions and the specific stock is still crucial. This way, if the market conditions change drastically, the trader can adjust his strategy accordingly.
- Exit the Trade: The final step is to exit the trade once the profit target is achieved or if the stop loss level is hit.
Positional Trading Vs Swing Trading
The main difference between positional trading and swing trading is that positional trading involves holding onto a position for the long term, usually a few months to years. Swing trading is a short-term strategy where traders aim to profit from price swings within a few days or weeks.
|Parameters||Positional Trading||Swing Trading|
|Time Frame||Long-term (Months to Years)||Short-term (Days to Weeks)|
|Analysis Type||Fundamental and Technical||Mainly Technical|
|Risk Level||Moderate to High||Moderate|
|Profit Potential||High, if the price reaches the expected level||Relatively lower, based on short-term price swings|
|Time Commitment||Less as trades are less frequent||High, as it requires daily monitoring|
|Holding Period||Typically holds positions for a longer duration||Positions are held for a shorter duration|
|Trade Frequency||Fewer trades due to longer holding periods||More frequent trades|
|Market Trend||Capitalizes on long-term market trends and cycles||Takes advantage of short-term price fluctuations|
|Risk Management||Focuses on risk management strategies for longer-duration trades||Utilizes tight stop-loss orders for risk control|
|Fundamental Factors||Considers fundamental analysis of companies and industries||Less emphasis on fundamental analysis|
|Technical Analysis||Utilizes technical indicators and chart patterns for trade decisions||Relies heavily on technical analysis|
|Position Sizing||Typically larger position sizes due to longer-term holding||Smaller position sizes due to shorter holding periods|
|Emotional Impact||Less prone to short-term market fluctuations and volatility||May be influenced by short-term price movements and emotions|
Best Time Frame For Positional Trading
The best time frame for positional trading revolves around using longer-term charts such as daily, weekly, or even monthly charts. Utilizing Exponential Moving Averages (EMAs) like the 50-day or 200-day EMAs often aids in recognizing long-term trends.
For instance, if a stock’s current price is above its 50-day or 200-day EMA, it’s generally considered to be in an uptrend, suggesting a good time to buy. Conversely, if the price is below these EMAs, it might signal a downtrend, and the trader might decide to sell or short the stock.
Position Trading Strategy
A successful position trading strategy primarily involves patience, fundamental analysis, and trend identification. The idea is to identify a trend and stick to it until the trend reverses.
Here are some popular strategies used in positional trading:
- Trend Following: This is the most common strategy used by positional traders. They identify the overall trend of a market or a particular asset and make trades in the direction of that trend.
- Contrarian Investing: This strategy involves buying and selling in contradiction to the prevailing sentiment of the time. A contrarian investor enters the market when others feel negative and exits when everyone else is optimistic.
- Breakout Trading: Traders identify a key level that, if the price surpasses it, would lead to significant price movement. They enter the market just as the price breaks through this level.
For instance, in the trend following, if the stock of Company X has been rising steadily for several months, a positional trader may decide to buy this stock, anticipating the upward trend will continue.
Similarly, in contrarian investing, if most traders are selling shares of Company Y due to negative news, a contrarian positional trader might buy these shares, anticipating that the company’s stock will rebound in the future.
In breakout trading, a trader may closely monitor a stock nearing a key resistance level. If the stock price breaks above this level, the trader will enter the market, expecting a sharp price rise.
What Is Positional Trading – Quick Summary
- Positional trading is a strategy where traders hold positions for the long term, aiming for substantial price changes to earn profits.
- It involves a thorough analysis of both fundamental and technical factors to make trading decisions.
- Positional trading differs from swing trading primarily in terms of the holding period and the analysis involved.
- The best time frame for positional trading typically involves using longer-term charts and EMAs as indicators.
- Popular positional trading strategies include trend following, contrarian investing, and breakout trading.
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Positional Trading Means – FAQs
1. What Is Positional Trading?
Positional trading is a strategy where investors maintain a position in a security for a long period, usually from a few months to several years, to profit from significant price changes.
2. Is positional trading profitable?
Yes, positional trading can be profitable if executed correctly. It capitalizes on large price shifts and could generate significant returns. However, it requires patience and the ability to withstand market volatility.
3. Is positional or intraday better?
It depends on the individual’s trading goals, risk tolerance, and time commitment. Intraday trading can provide quicker returns and requires daily market monitoring. In contrast, positional trading is long-term and can yield substantial profits but requires patience and a tolerance for short-term market fluctuations.
4. How do I start positional trading?
To start positional trading, begin with understanding the basics of the stock market, learn to analyze market trends and economic conditions, and develop a risk management plan. It’s also essential to follow a disciplined approach, have patience, and not be influenced by short-term market movements.
5. What is best strategy for positional trading?
There is no “best” strategy, as it depends on individual preferences. However, popular strategies include trend following, contrarian investing, and breakout trading. The key is identifying a strategy that aligns with your risk tolerance and trading goals.
6. What are the disadvantages of position trading?
Some disadvantages of positional trading include the need for substantial capital, the potential for significant losses if the market goes against the position, and the requirement for patience and emotional resilience during market downturns.
7. What are the types of positions in trading?
There are two main types of positions in trading: long and short. A long position is when a trader buys a security with the expectation that its price will rise, while a short position is when a trader borrows a security and sells it, expecting to repurchase it at a lower price in the future.