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What is position trading?

By Douglas Thane

Position trading offers the opportunity to make significant gains, but there are several factors to consider before adopting this strategy.

Position trading is a long-term trading strategy that seeks to capitalise on trends in the market. As the intention is not to trade actively, position trading can be considered the closest rung on the ladder to a true buy and hold investment strategy.

Position traders identify and buy stocks they can keep for weeks, months or even years. The difference between position trading and investing is that while investors are looking to sit on a stock indefinitely, position traders will periodically assess their purchases- and sell if the overall momentum appears to have stopped. Position traders may not be troubled by the small downward corrections frequently encountered along the way- unlike day traders or scalpers - but they do keep a watchful eye on the overall trend of their stock.

Position trading may seem to be the polar opposite of day trading, but in fact the two strategies do have some similarities. Both are focused on identifying patterns and trends in a stock, the difference between the styles being the time period being considered.

Position traders tend to enjoy the thorough macro-level research required in identifying picks and get satisfaction from spotting trends in the market. The strategy inherently requires less minute by minute monitoring than faster-paced strategies such as day trading, but that initial research used to identify picks is critical to success.

Position trading pros

Position trading is a common introductory strategy as it has the potential for significant gains without requiring the constant attention needed in other strategies such as day trading. Some of the potential advantages are:

  • Low transaction fees. Most trading platforms charge a per trade transaction fee. Position trading by definition requires infrequent trades and this will reduce the overall amount spent. Ensuring any long-term returns are not eroded by constant transaction fees makes position trading attractive.
  • Smaller time commitment. Position trading does require significant upfront research, but this can be done on your schedule, in a time frame to which you are able to commit. Positions should be monitored regularly but do not require the constant attention to minor fluctuations needed in day trading. Periodic adjustments of stop-loss positions can mitigate monitoring requirement.
  • Less noise. Position traders seek to identify overall trends in the market and to capitalise on the inevitable shifts in the economy. Position traders don’t need to be hung up on every statistic from every company and can instead focus on the big picture.

Position trading cons

Position trading does offer the opportunity to make significant gains, however there are factors to consider before adopting this strategy. Some of the possible drawbacks to position trading are:

  • Trend reversal. A major concern for a position trader is that minor fluctuations in the price of a security can be indications of a major price correction or reversal. Less frequent monitoring of small price changes is required, but attention is needed to identify momentum shifts.
  • Low liquidity. Position traders typically have a large proportion of their investments tied up in strategic purchases. This means keeping a significant amount of their capital invested most of the time.
  • Opportunity cost. Position trading is best suited to people looking to grow their assets over a long period. Day traders accustomed to frequently identifying new opportunities may be discouraged by the lack of available capital for new opportunities when position trading.

Is position trading for you?

When deciding if position trading strategies are right for you, there are several factors which you must consider. The most important of these are:

The size of your portfolio: It can take a long time to realise gains and, because of this, position trading is best suited to traders with larger portfolios. Your individual situation should be considered.

The amount of time you can spend on your account: Position trading requires significantly less time commitment and attention than day trading, but it still requires more than a buy and hold investment strategy.

How quickly you need to capitalise on gains: Position trading requires that you commit funds to long-term growth.

Your individual risk tolerance: As every trade inevitably carries risk, position traders reduce their risk by making fewer trades. The potential for loss is still present but the risk of a sudden loss is reduced by thorough initial research.

Prevailing market conditions: Position trading is best suited to a bullish market as the individual success of securities is affected, in part, by the overall movement of the market. Prevailing bearish or stagnant market conditions are not beneficial to a position trader as they will not have the flexibility to capitalise on fluctuations in security price.

No single trading strategy is necessarily better than another and there is no magic answer to the question of which is the best option for you. It comes down to individual requirements and the consideration of the various factors. There is always the option of blending strategies or transitioning over time from one to another. The best policy is to spend time considering your individual goals and choose the strategy with which they best align.

FURTHER READING: What is swing trading?

FURTHER READING: What is scalping and how do you do it?

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