Positional Trading; Meaning & Strategies
Created on 16 Mar 2023
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Stock trading is one of the two major ways that people can interact with the stock market. Every day, millions of traders and investors go to the stock market to test their luck and improve their trading abilities. Those that have access to the trade secrets win enormously, while others in the market lose money.
Stock market traders typically choose one of the numerous trading tactics accessible based on their financial objectives, stock trading preferences, and the length of time they intend to hold their investments.
Trading can be divided into two primary categories: short-term and long-term. Newcomers have no clue which form of trading is best for them, whether short-term or long-term. Hence, to help clear the air here is a glimpse into the world of positional trading.
What is Positional trading?
Positional trading is a method of long-term investing that adheres to the buy-and-hold philosophy for several months or even several years. Unless it changes the trader's long-term perspective on the position's significance in the stock market, such a trader is less worried by short-term price swings and the day's news.
Traders who employ this tactic are referred to as "position traders". Opportunities for profit-making can result from following the latest market trend.
Positional trading operates under the tenet of purchasing and holding stocks based on a trend or theme that is anticipated to take off in the near future and then selling the stocks to make a profit when the trend reaches its pinnacle and the industry experiences significant growth.
Position traders frequently try to capture the most lucrative part of the move when an asset moves in a long-term trend. A significant change in the underlying fundamentals triggers a change in price for the majority of assets, including stocks.
Yet, due to significant changes to their own or the industry's fundamentals, certain assets are idle for a while before shifting.
So basically, position traders don't trade often, and they are completely the opposite of day traders. The majority conduct less than 10 transactions annually.
How are Trends Identified in Positional Trading?
The market or economic trend is recognised by a position trader, who then invests in the stocks of the companies that are part of that trend. These trends may be particular, cyclical, or even long-term.
Examples of such trends include rising fascination with electric vehicles, the production of renewable energy, etc. Such patterns are discovered based on numerous variables that can be discovered using various strategies.
The trader typically employs a variety of strategies to pinpoint the trend, including technical and fundamental analysis to gauge the market mood. Macroeconomic considerations are a significant additional source for trend detection.
In addition to these three previous performances, price fluctuation patterns and other pieces of information are employed to spot trends.
The other way for the identification of trend lines would be moving averages revealing trends. Moving averages removes a lot of background noise and price movement. The 25,50, and 200-day SMA (Simple Moving Average) durations are typical.
This is because, once weekends and holidays are subtracted, 50 days roughly correspond to a quarter's worth of trade days, and 200 days roughly represent a year.
More specifically, to calculate the 50-day moving average, add the closing prices of the stock for the previous 50 days, divide by 50, and to calculate the 200-day moving average, add the closing prices for the previous 200 days, and divide by 200.
Moving averages don't forecast the future value of a stock; instead, they merely show how the price is trending over time on average.
Positional Trading Strategies
Although there are no predefined strategies for position traders to employ, a trader can nonetheless choose their bets based on their skill set. Technical analysis is often a strength for traders. Traders frequently undertake the extra effort to master fundamental analysis in addition to technical analysis. This helps them considerably increase the reliability of their insight.
The methods that a trader can use with their positional trading approach are as follows:
1. Technical Strategy: A technical strategy only uses charts to determine the long-term trend of the asset price. A few examples of tradable assets that are frequently subject to dynamics of supply and demand and that can be forecast using technical analysis include stocks, bonds, futures, and currency pairs.
In reality, some individuals believe that technical analysis consists solely of the examination of supply and demand dynamics as they appear in shifts in the market price of a security.
Price movements are the most frequent application of technical analysis, though some analysts also monitor other variables like trade volume or open interest levels.
In this deal, just market conditions are taken into account, and basic factors are ignored.
2. Fundamental Strategy: A fundamental approach focuses more on the underlying factors affecting the price of an asset. The strategy aims for a structural change in the fundamentals of the corporate environment while only considering qualitative factors. Using information that is readily accessible to the public, fundamental analysis determines the value of a stock or any other type of investment.
The fundamental analysis takes into account data such as sales, profits, future growth, return on equity, profit margins, and other aspects in order to determine a company's underlying value and potential for future growth for stocks.
All of this information can be found in a corporation's financial statements.
Analysts frequently evaluate the overall state of the economy, the competitiveness of the industry in issue, and then the performance of each particular firm to arrive at a reasonable market value for a stock.
3. Techno-fundamental strategy: Using both technical and fundamental analysis, a techno-fundamental approach bases trading judgements. In order to track long-term qualitative growth, charts are utilised to analyse price behaviour and verify fundamentals.
If the price reflects the fundamental shift, the transaction is completed. The selection of possible trading bets is aided by the use of technical and fundamental screeners in these strategies.
Traders can include stop-loss rules as well as entry and exit rules in their strategies.
A stop-loss order is an order made to a broker to buy or sell a certain stock when it reaches a particular price. A stop-loss is intended to reduce an investor's loss on an investment in a security.
The entry point in investing is the price at which a security is suitable for investment or purchase. The price at which an investor should sell their investment is referred to as the exit point.
Such fundamental strategies can help the investor minimise the risk. When beginning a deal, traders should also consider their capital position and prior market experience.
4. Support and Resistance: Traders can visualise the range in which the asset price is moving with the help of support and resistance lines.
Where a downturn is predicted to pause because demand is concentrated, support is found. When a temporary pause in an uptrend is anticipated due to a concentration of supply, resistance occurs.
Price has a lower limit set by support and an upper limit set by resistance. Here's how to determine the price of an asset's support and resistance levels.
Using historical data to pinpoint the asset's support and resistance levels is a sound strategy. Periods of substantial gains and losses are taken into consideration by traders as a predictor of future market changes.
The roles of support and resistance are altered when a breakout occurs. To understand how an asset price has changed, traders consider prior support and resistance levels.
5. Breakout Trading strategy: The price line must cross either the support or resistance level for the breakout trading strategy to be used. The trader opens a long position when the overhead resistance is broken. When the price crosses the support line, on the other hand, he opens a short position. This trading method will be profitable if you are skilled at determining periodic support and resistance levels.
6. Pullback Strategy: Pullbacks are brief periods of market reconciliation that take place when prices are rising. In order to plan entrance, traders use pullbacks in their trading tactics. To buy low and sell high is the rule. Thus, traders enter the market when the price declines during a downturn. They later eliminate the possibility of a trend reversal when the pullback occurs.
Positional traders also use stop losses and capital allocation rules as risk management strategies to prevent losing everything during choppy market conditions. Positional traders primarily base their choices in trading on the tenet that if a trend has been established, it will likely persist.
They trade in accordance with the trend and make use of both fundamental and technical analysis in order to increase their market profit share. To limit risk in positional trading, it is crucial for the trader to maintain a close eye on the market. Therefore the choice of technique used relies on the trader.
How individuals trade using Positional Trading
Between day traders and long-term investors, position traders occupy a middle ground. Hence, if you believe that position trading is your style, you should keep yourself informed on the position trading techniques that traders frequently employ.
Why is a positional trading strategy necessary? Longer investment periods for position traders lead to greater profits, but they also raise the trader's inherent risk. You may find yourself on the wrong side of the market if the trend changes throughout the time period. Having a strategy in place will enable you to accurately gauge entrance and exit points and anticipate rising trends.
Position traders base their decisions on both technical and fundamental analysis, but technical analysis makes up the majority of their tactics. As you analyse a chart, you are also examining the general opinion of an asset, which gives you crucial information for creating profitable trade plans.
Trades made by position traders are passive. They must grasp market trends, analyse patterns, and learn indicators to spot any deviations from the current trend because, unlike day traders, they are not tied to their computers all day.
The Bottom Line
Position trading is no different from other forms of trading in that traders must test and train themselves before seeing significant market success. One must devote a lot of time to watching, understanding, and evaluating market moves in order to study position trading. The best way to learn position trading is to examine past data and look for patterns. If a trader is aware of market patterns, creating and implementing trading strategies while sticking to fundamental risk management principles becomes relatively easy.
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