Positional Trading

Positional trading is a long-term investment approach that follows the buy-and-hold strategy for long periods. If you're an investor looking to generate substantial returns from the financial markets, you must have heard of several trading styles and strategies. Positional trading is one such strategy. Let us explore what is positional trading and discuss some tips for getting started with this popular strategy.

• Positional trading is a medium-term to long-term strategy in which you hold a position for several weeks, months, or years to leverage longer price movements.
• It has many advantages like less stress, lower volatility-related risks and better risk management.
• However, its limitations include exposure to overnight or weekend risks and capital lock-in.
• Ultimately, a position trading strategy works for busy traders or those who want to capitalise on longer-term price changes.

To trade in the financial markets, you can use various strategies based on your risk tolerance, capital availability and investment horizon. If you are looking to profit from potentially favourable long-term price movements, a position trading strategy may be suitable for you.
 

Positional trading involves taking a long position in the market and holding the securities purchased for several weeks or months. Some positions may even be held for years. This type of long-term outlook is primarily aimed at leveraging price movements over extended periods rather than short-term price changes. Such positive price movements may occur because of a favourable development or event that you anticipate will happen in the next few weeks or months.

The fundamental principle driving positional trading is identifying favourable trends and capitalising on them. These trends may be event-specific, seasonal or simply due to changing market sentiment. However, before you initiate your position trading strategy, you need to learn how to spot a potential upward trend.
 

Since positional trading involves more than just short-term price changes, you must also consider various aspects of fundamental analysis and technical analysis. Here are some ways to do this effectively.

• Resistance and support levels: One of the easiest ways to identify the trend and any potential reversals is to look for the support or resistance levels. The support level is the price below which the stock price fails to fall, while the resistance level is the highest price a stock attains before reversing. If a stock hits the same support or resistance levels more frequently, you need to check for changes in the trading volume to assess whether a breakout is imminent.
• Breakout trading: A breakout occurs when the price goes beyond an established support or resistance level. For instance, if a stock price breaks out of a prevailing resistance level and rises beyond it, a new bullish trend may be occurring in the market. If you want to implement a position trading strategy, it may be a good time to take a long position in that stock, provided other fundamentals of the company also support a growth hypothesis.
• Range-based trading: If the stock price oscillates between established support and resistance levels, waiting for a breakout may prove to be futile. Instead, you can implement a strategy to capitalise on the defined fluctuations between the established price range. You can also identify assets that are overbought (or oversold) and sell (or buy) them accordingly.

At the outset, passive investing and positional trading may both seem similar. However, the approach that passive investors take is fairly different from the strategy followed by position traders.
 

Passive investors typically follow a buy-and-hold strategy. They tend to invest in diversified portfolios that may include index funds, equity funds, ETFs and other investments that aim to match the market’s performance. They also make fewer trades and ignore short-term market fluctuations. To make investment choices, passive investors rely on fundamental analysis rather than technical analysis.
 

Traders who adopt the position trading strategy, on the other hand, take a more active approach in the market. They attempt to profit from medium-term and long-term price movements and hold their positions for weeks or months (or sometimes years). To identify suitable positions, these traders use a mix of technical analysis and fundamental analysis. Unlike intraday traders, positional traders do not analyse short-term price changes.

When implemented effectively, positional trading gives trades the following advantages:

• Less time-consuming: Positional trading does not require daily monitoring like day trading does. You can analyse the markets periodically, set your positions and check in periodically. This is less time-consuming and better suited for busy traders.
• Potential for larger profits: By holding positions for longer periods, you can potentially capture more significant price movements and trends. This strategy, if successful, allows you to accumulate larger gains because your positions have more time to develop and leverage price changes.
• Lower stress for the trader: Since positional trading is a long-term strategy, it reduces the pressure of having to constantly monitor the markets and make split-second decisions — as is the case with intraday trading. This helps you make more reasonable and well-informed trades.
• Better risk management: Holding positions over a longer period also gives you more time to analyse market conditions. This, in turn, allows you to adjust your strategies and implement effective stop-loss orders — thus improving the overall risk management in your trades.

A position trading strategy also has some downsides that you should be aware of. They include the following:

• Capital lock-in: In positional trading, you need to hold your assets for extended periods. This means a significant portion of your capital may be tied up in open positions, thus limiting your liquidity.
• Exposure to overnight risks: Holding on to open positions over the medium term or long term exposes you to overnight risks and weekend risks. Your positions may be affected by events that occur outside of trading hours.
• Potentially missed short-term opportunities: When you focus on trends that occur over the longer term, you may miss out on potentially profitable short-term price fluctuations. This may reduce your portfolio returns, especially if your positional trading strategy is not profitable.

If position trading sounds like something you would like to try, here is a handy guide to help you get started with this strategy.

• Determine the trend: Analyse price charts and identify what the long-term trend may be. You can use moving averages, trend lines and support and resistance levels to make this assessment. Furthermore, you should also combine this with a fundamental analysis of the asset’s underlying value to confirm the strength and potential duration of the trend.
• Identify the entry points: Wait for the price to pull back or consolidate to identify an opportune moment to enter the market. Here, technical indicators like the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) can help. Your entry price should be chosen after you have assessed the risks and possible returns.
• Set your position size and manage risks: Based on your budget, capital availability and risk tolerance, determine an appropriate position size. Additionally, to limit potential losses, ensure that you set stop-loss orders. Ideally, you need to place a stop-loss order below key support levels for long positions. So, if the price falls, your loss will be limited to a known amount.
• Exit your position smartly: Set clear profit targets based on the levels of different technical indicators or use a predetermined percentage of gain to determine the exit. However, make sure you are prepared to exit the position if you observe signs of a trend reversal or if your initial analysis no longer holds true.

While positional trading may seem less risky than intraday trading, it certainly carries other risks. Any trades executed using market-linked instruments are vulnerable to volatility and potentially risky price changes. So, ensure that you are aware of the downside in your position trading strategy and make use of stop-loss orders to limit the risk as much as possible. This will ensure that you do not lose all your capital in one trade.