What is Position Trading? Strategies, Benefits, Drawbacks

Position trading, swing trading, intraday trading—you’ve probably heard about these terms if you have been reading about the stock market. These terms are actually the names of unique stock market trading styles. This article aims to cover—the longer term trading approach—position trading. So, let’s take a deep dive and discuss the strategies, benefits and drawbacks of this popular trading method. 

What is Position Trading?

In the position trading strategy, traders maintain their positions for an extended period of time, from a few weeks up to a few months. In comparison to short-term trading, the goal of positional trading is to profit from a larger movement in the stock's price. They usually analyse stocks from a technical perspective; however, since they intend to hold the stock for long periods, positional traders are likely to dedicate several hours analysing the fundamentals of the underlying company. They then determine the appropriate position size based on their risk tolerance and the potential reward of the trade. 

Example To Understand Position Trading

An illustration of positional trading in the stock market in India is given below:

Consider a trader who discovers a stock of a business with strong fundamentals and a long history of upward price movement. The trader chooses to purchase the stock at a price of 100 rupees a share and to keep the investment for some months.

The stock price rises over the following few weeks to Rs. 120, earning the dealer Rs. 20 each share in profit. In anticipation of additional price growth, the trader chooses to hold the position. However, the market's mood shifts, and the broader market experiences a correction. The stock price therefore drops to Rs. 110 per share. However, since the trader has familiarised themselves with the fundamentals of the company, they choose to hang onto the position in the hope that the price would eventually rise again.

A couple of months later, a positive sentiment is prevailing in the market, the underlying company’s fundamentals play out, and the share price shoots up to Rs. 150. The trader makes the decision to close the position and keep his profit. Thus, the trader takes home a profit of Rs. 50 per share—this is prior to the tax deduction. 
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Position Trading Strategies

Technical Analysis Approach  

In the technical analysis approach position traders mainly place their trades based on the price action of the stock/asset. They base their trades on different technical trading approaches like momentum trading, breakout trading, or range trading approach. 

The former involves buying stocks which are showing signs of growth and selling the ones that are showing decline. While breakout trading involves purchasing stocks or securities when they break out of a trading range or resistance level. Lastly, in the range trading techniques, the trader trades those stocks wherein the price is fluctuating within discernible boundaries—created by a major support and resistance. A technical trader may also implement several technical indicators to help them make successful trades. 

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Fundamental Analysis Approach 

This approach revolves around examining a company's financial records and other aspects to ascertain its true value. Stocks that are undervalued in relation to earnings, revenue, or other measures are sought after by fundamental traders. Apart from analysing company fundamentals, fundamental traders may assess macroeconomic indicators, company, industry trends, geopolitical events, and other factors that may impact the stock’s value over the long term. This approach is very much synonymous to active investing. 

Techno-Funda Approach 

This is a combination of both the approaches mentioned above—the trader refers to a combination of technical and fundamental parameters to place their trades. For example, a trader may scan the price charts of several stocks, select those that stand out from a price action perspective, and then start analysing them fundamentally. After performing fundamental analysis, they further refine their watchlist, eliminating those stocks that are fundamentally weak. Then, they may wait for a technical signal—like a breakout—to build positions.   

Benefits of Positional Trading 

Greater profit potential: Because positional traders keep their positions for longer periods of time, they have the chance to benefit more from the stock's price movement.

Less brokerage: Positional traders have to deal with lesser brokerage and transaction expenses since they execute fewer deals.

Less market noise: Positional traders experience more stable trading since they are less impacted by noise and short-term market movements when they hold positions for longer periods of time.

Flexibility: Positional traders enjoy the freedom to maintain their positions during brief market corrections and to close them out when the market is in their favour.

Drawbacks of Positional Trading 

Increase exposure to market risks: Since market circumstances can change over the course of time, position trades can experience volatile markets for extended periods. Additionally, they are always exposed to overnight or weekend risks. 

False signals: In volatile markets, a position trader may encounter several false signals, which could lead to capital losses. 

Opportunity cost: By tying up capital, holding a position for more time than needed prevents one from making additional successful deals.

Emotion based decision-making: Holding positions over an extended period of time might result in traders making emotional decisions since they may grow connected to their positions, which could result in losses.

Conclusion

Positional traders maintain their positions for an extended period of time, ranging from a few weeks to a number of months. As opposed to short-term trading or swing trading, the objective of positional trading is to take advantage of a greater trend in the stock's price movement. Positional trading allows for the adoption of a variety of strategies like relying on technical strategies, fundamental research, or a combination of the two. You can explore these strategies and practice positional trading with the help of a stock market app. 

That said, positional trading strategies have both pros as well as cons, so before putting any trading method into practice, traders ought to do their homework and have a clear plan.