If you’re wondering what position trading is, you have come to the right place.
Position trading can be appealing for a number of reasons. Stock traders who want to take a hands-on approach to trading may be drawn to the research and various strategies needed to be an efficient position trader.
But is position trading a good idea? Is it worth giving a try? Can it earn you profits?
Let’s start with a brief overview of the practice of position trading in order to answer these questions.
Meaning of position trading
In the simplest definition, position trading is the practice of closing an investment position after hitting a particular achievement on the price charts. It is also commonly referred to as “buy-and-hold.”
For example, a position trader might decide to keep a position open only until that particular stock reaches what they regard, based on research, as its peak.
The basic underlying concept is to buy a security, hold for a long period of time, and then sell. Traders do this to try and benefit from long-term, oftentimes big fluctuations in the stock price.
How position trading works
Position trading requires you to commit your money for the long term as opposed to other methods such as day trading or swing trading, where you buy and sell stocks on a frequent basis.
Individuals that engage in this type of trading rely on long-term historical patterns and general market trends to pick stocks they believe will increase dramatically over the long term.
Generally, these traders don’t let daily market news or price movement influence their trading decisions. Instead, a position trader focusses on long-term outcomes and allows his stock holdings to rise or fall in sync with short-term market trends.
Position traders use both fundamental and technical analysis tools and spend the time needed to analyze various details of a particular stock and determine if it’s likely to reach their desired profit level.
Some of their most common technical analysis tools that position traders use includes the 200-day moving average and other indicators that are based on long-term market trends.
Position trading example
To help you understand the ins and outs of position trading, let’s take a closer look at the following example.
Assume it is November 2021, and you believe Nvidia (NASDAQ: NVDA) is set to benefit from a semiconductor shortage.
If you’re correct, then the value of Nvidia could increase over the next several months. Therefore, you decide to buy some shares.
On Nov. 26, you buy 100 shares at $320 apiece. And you want to make sure to get out of the stock if its value begins to fall. Therefore, you place a stop-loss order at $300, below the recent swing low.
Satisfied with your position, you keep an eye on the stock every once in a while and watch as it creeps up to around $410 by mid-February.
You’re contented with this gain and offload all your Nvidia stock, walking away with a profit of $90 per share.
Position trading is simple as this example. However, like all other trading methods, position trading does not always work out this clean, and there is no guarantee of making a profit.
Benefits of position trading
When stock prices are on an upward trajectory in a bull market or on a downward trajectory in a bear market, it makes sense to take a position to ride the trend.
It makes little sense in this instance to get and out of the bull market trying to take small pieces at a time, and likely miss out on parts of the trend and pay more fees to your broker.
The negative side of position trading is that the stock market spends most of its time in a sideways range (no real up or down trend) instead of being in a particular trend.
When the market is in sideways range, things can be quite tough. Ideally you want movement in the market when you trade. It doesn’t matter if the market is up or down, so long as prices are moving traders are happy.
What strategies do position traders use?
Let’s break down some techniques and strategies that position traders use to find, analyze, and make trades.
- Fundamental analysis strategy
Some position traders put in the effort to learn and understand fundamental analysis to make money trading.
Fundamental analysis basically involves taking a deeper look at what is happening in a company. The traders do that by looking through financial records, earnings reports, FDA filings, SEC filings, CEO comments, and more.
By analyzing the fundamentals of a company, a trader can have an understanding of the company’s performance, its future outlook, and its expected profits.
Position traders can also use fundamental analysis to determine whether a stock is fairly priced. Having this information can help traders get an idea of what is the minds of other traders.
- Technical analysis strategy
Generally, technical analysis tools don’t play a huge role in identifying trading opportunities due to the long-term approach position traders use to identify trades.
Position traders pay more attention to economic data such as the state of the labor market, inflation, interest rates, tariffs, and other factors that affect stock values over a long period of time.
But technical indicators can still be used to evaluate a stock’s potential, particularly when a position trader is using information that is based on past data.
Examples of technical analysis indicators that are often used by position traders include:
- 50-day moving average (MA) trading
- Support and resistance levels
- Breakouts
- Pullback and retracement indicators
Bottom Line
The main difference between position trading and day trading is the amount of time involved between buying a stock and selling it.
While day traders buy and sell stocks with minutes or hours, position traders will hold stocks for a long period of time, such as months or years.
For many positions traders, a decision to adopt this trading style is made with long-term goals in mind. If an individual is looking to have viable savings for retirement, they are most likely going to consider position trading instead of short-term strategies like day and swing trading.
This is largely because of the fact that the individual doesn’t have to take on the risk needed to unlock the door for quick and short-term returns since he has the benefit of time on his side.
Overall, a position trader is committed to waiting until the stock they are trading rises to a certain price when they can close the position and liquidate the stock.
And even though anybody who follows the stock market can become a position trader if they so wish, this trading method is likely to favor individuals that have an understating of technical analysis and can hold their nerve and follow their trading plan.