You must have heard about positional trading in your stock market trading career. Once, Jesse Livermore said:
Money is made by sitting, not trading.
It means that big money can be made in markets by holding a winning trade for a longer period of time rather than frequently buying and selling stocks or financial instruments.
In this article, we’ll discuss a comprehensive guide to positional trading and identify key differences between positional trading and swing trading. We will also discuss the pros and cons of positional trading.
What is Positional Trading?
Positional trading is a style of trading in which traders hold their trades for a long time, often for a period of weeks or months. Position traders are different from long-term investors. Investors hold their investments for years.
In positional trading, the aim of traders is to catch long-term trends in the market rather than try to make short-term profits by constantly buying and selling scripts like day traders.
Position Trading Strategies
In position trading, most traders use technical analysis and some use fundamental analysis to identify trends and decide when to enter and exit trades. To protect against potential losses, they may also employ risk management strategies, including stop-loss orders.
Following are the strategies that a trader can apply to their position trading:
Technical Analysis for position trading:
Technical analysis is a way to study charts and find trades using a combination of price and volume. Some of the key techniques used in technical analysis include chart patterns, support & resistance, trend analysis, and indicator analysis.
- Chart patterns are formations on a stock chart that traders believe may indicate future price changes. Some examples of chart patterns include head and shoulders, cup patterns, double tops and and triple tops and bottoms.
- Trend analysis is the process of identifying a trend in the market. In the market, there are three types of trends: uptrends, downtrends, and sideways trends.
While in this modern world, technical analysis is widely used by traders and investors, it’s also important to note that technical analysis works best when combined with other analysis methods; fundamental analysis is a good example.
Fundamental analysis for position trading:
By looking at the underlying economic and financial elements of an asset, fundamental analysis is a technique for determining the right value of that asset. This can be used to make informed decisions about whether to buy, hold, or sell an asset.
Positional traders can utilize fundamental research to identify long-term trends, choose the stocks to trade, and determine the best times to initiate and exit positions.
When conducting fundamental analysis for positional trading, some of the basic elements that fundamental analysts may take into account include:
- Company’s Earnings:
- Revenue:
- Cash flow:
- Debt:
- Valuation:
It’s important to remember that fundamental analysis might take time and may not always produce accurate outcomes. In short, we can say fundamental analysis is more subjective.
Position Trading Strategies using Technical Analysis:
Position traders read chart patterns with some indicators to identify long-term trends in the trade.
Support and Resistance Trading:
The support and resistance (S&R) are specific price levels on a chart that shows the maximum amount of either buying or selling.
The support price is a price at which buyers dominate the sellers. Likewise, the resistance price is a price at which sellers dominate the buyers.
Support– An area or “zone” on the chart with potential buying pressure to push the price higher.
Resistance – An area or “zone” on the chart with potential selling pressure to push the price lower.
The time frame for positional trading is the higher time frame (weekly or monthly). A higher time frame shows the bigger picture in the script. That helps position traders to identify the long-term trend in the securities.
Breakout Trading:
All types of traders, from intraday to position traders, use breakout trading as a common method for identifying potential buying or selling opportunities in the financial markets. In breakout trading, the first step is to identify the key support or resistance levels of stocks or other financial instruments. Once the price confirms the breakout of these levels, the trader then trades in the direction of the breakout. The key to successful breakout trading is to identify the right levels of support and resistance.
A breakout trading strategy indicates one-directional movement with high volume.
Breakout trading is my favorite trading style because, in breakouts, big money comes like rain. And if you add a cup pattern breakout to it, then it can be worth ten stars.
The time frame can be daily, weekly, or monthly.
If you want to learn the complete cup pattern setup with rules and live examples, you can use this eBook:
It’s important to note that in breakout trading, price movement can be volatile, and a single trade can result in significant profit or significant loss in a short period of time. Thus, you should be good at risk management in breakout trading.
Risk management in Positional Trading:
Risk management is an essential factor in position trading because it helps traders minimize potential losses and protect their capital. The relationship between risk and reward is powerful in positional trading.
Following are the different techniques that a trader can apply to their risk management:
Use a stop loss order: to exit from the stock or other financial instrument if it drops below a certain price. Stop-loss orders can protect your profits and trading capital from big losses.
Remember this: “Either cut your finger or cut your hand”. (Sarcastically said.)
Use a trailing stop loss: This helps traders capture as many possible moves in the long-term trend. This can help traders lock in profits and limit potential losses at the same time.
The 2% Rule in Trading: This rule says that on any given trade, your loss should not exceed 2% of your total capital.
E.g. : Trading capital= Rs 100,000
Risk per trade= 2% of trading capital : Rs 2000
Additionally, diversifying your portfolio is also a crucial step in risk management.
Key Differences between Position Trading vs. Swing Trading
Position trading and swing trading are both popular and most used trading strategies, but they have some key differences.
| Key Factors: | Position Trading: | Swing Trading: |
| Holding Period- | weeks or months | few days or week |
| Time Frame- | weekly or monthly | daily or hourly |
| Frequency of Trades- | fewer trades | comparatively more trades |
| Traders look for- | long-term trend | short-term trend |
| Strategy called- | wealth generation | income creation |
Furthermore, both trading styles require almost the same trading mindset. As a position trader, you should be more patient so that you can hold your trades for longer periods of time.
Pros and Cons of Positional Trading:
Pros:
- There are opportunities to ride long-term trends:
One of the primary advantages of positional trading is the possibility of long-term returns. Long-term trends can produce higher gains for traders who hold stocks or other financial instruments for a longer period of time.
- It eliminates short-term market volatility: Positional traders can focus more on long-term trends, which can protect them from short-term market volatility.
- Position traders focus on quality trades: This advantage of positional trading helps traders avoid impulsive trades and prevents them from overtrading.
- Furthermore, positional trading requires less screen time, allowing you to focus on other aspects of your life. And position trading is less risky than day trading and scalping.
Cons:
- Positional trading requires clear direction in the financial market or in stocks. Positional trading can be less profitable in choppy market conditions.
- It requires a large amount of trading capital to make a decent amount of profit.
- By focusing on long-term trends, positional traders may miss out on short-term opportunities in the market.
Conclusion:
If you want to make another source of income from the financial markets but have less time to fully participate as a day trader, you can start with swing trading and positional trading. Swing trading generates income from markets through short-term gains, whereas positional trading generates wealth through long-term market trends.
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FAQ
Is positional trading suitable for beginners?
If we compare it to day trading or scalping, swing and positional trading are best suited for beginners. But it can be challenging as it requires a higher level of market knowledge as well as the right trading mindset, including patience and discipline.
How is positional trading different from day trading?
Positional trading involves holding a stock or other financial script for an extended period of time, while day trading involves buying and selling a stock or other financial scripts within the same trading day.
Position trading requires less screen time and is also less risky, while day trading requires more screen time and can be more risky.
Which indicator is best for positional trading?
The combination of price, volume, and an indicator can generate good results for positional traders. Moving averages, RSI (relative strength index), and Fibonacci retracement are some of the best indicators. However, other indicators may also be used.
What type of market is best for positional trading?
Trending markets or one directional markets are best suited for positional trading. It can be less profitable in choppy or sideways market conditions.
How do positional traders identify the trade?
Some positional traders use fundamental analysis to identify the stock, looking at factors such as a company’s finances, management, some ratios, and economic conditions. Most position traders use technical analysis using chart patterns, support and resistance levels, and trend analysis.