As you read about making money in the stock market, you often hear about the passive buy-and-hold investors and the fast-paced day traders and swing traders. However, there’s one trading style that’s underacknowledged, and for many, it’s the perfect option to bridge the gap between low-risk/low-reward and high-risk/high-reward investing styles.
That style of trading is known as position trading.
Position traders aren’t concerned with the short-term fluctuations the market experiences nor do they hold assets for extremely long periods of time. They live in the middle ground, banking on medium-term volatility with holding time frames usually between a few months and a couple of years.
What Is Position Trading?
Position trading is a mid-term trading style that’s commonly referred to as trend following. Position traders use a mix of fundamental analysis, technical analysis, and mid-term trading strategies to find, define, and capitalize on trends in the market.
As a position trader, you’re not concerned with short-term price fluctuations like a trader, nor are you content holding a stock through a reversal like a passive investor. Your goal is to buy at the bottom of the trend and sell at the top. That means you could end up holding a stock for two or three years to take full advantage of long-term trends.
You may be thinking, “that sounds like buy-and-hold investing,” and you’re right, but there are a few key differences between the two.
- Time Frame. Buy-and-hold investors usually hold onto assets for long periods of time, often 10 years or longer. Position traders only hold investments as long as the asset’s price is headed in the right direction. Few trends last longer than a couple of years.
- Passive vs. Active. Long-term investments are passive investments. The investor knows the market moves in peaks and troughs and accepts trend reversals from time to time. Position traders take an active approach to long-term trading and never hold an asset through a reversal.
- Technical vs. Fundamental Analysis. When you make long-term investments, you’re likely going to focus most of your research on the fundamentals to determine a fair market valuation. If you’re a position trader, you rely on both technical and fundamental analysis to determine a stock’s short-term and long-term prospects.
How Position Trading Works
Position trading takes a bit more work than passive investing, but it’s not nearly as cumbersome as fast-paced day or swing trading. Here’s how it works:
- Choose a Strategy. Your first step as a position trader is to adopt a trading strategy. Some of the most popular include breakout, support-and-resistance, range, and pullback-and-retracement trading strategies. More on these shortly.
- Find a Trend. Use stock screeners to find the types of stocks you’re looking for that are either at the beginning of a trend or likely to experience a reversal you can take advantage of soon.
- Use Your Strategy. Use your trading strategy to determine the best entry. If you’re taking a long position, you want the lowest entry possible. If you’re tackling a downward trend with a short position, you want the highest entry possible.
- Enter Your Trade and Set a Stop-Loss. Wait for the perfect time to enter your trade based on your strategy. Also, set a trailing stop-loss order to lock in profits and reduce the risk of being caught in a reversal.
- Be Patient. Keep in mind that when you take a position, it’s a relatively long-term position. Your goal is to keep riding the wave until the seas calm, no matter how long that takes. As you wait for peak profitability, keep your eyes on technical data and fundamental news, but don’t pay much attention to short-term price movements.
- Know When to Fold ‘em. When fundamental news, investor sentiment, and technical data all point to a coming reversal, it’s time to exit your position and enjoy your profits.
Position Trading Strategies
Entering the financial markets without a trading strategy is akin to entering a boxing ring with Mike Tyson without formal training. Position trading strategies use technical indicators like moving averages and support and resistance levels to pinpoint the best times to enter and exit trades based on market trends.
As with any other kind of trading, there are several strategies that have proven to be effective ways to generate profits. Here are some of the most popular strategies position traders use to take advantage of price trends.
Support & Resistance Trading Strategy
Support and resistance are technical terms that describe invisible barriers in the market. Support is a psychological barrier where investors believe an asset’s valuation is so low that it’s not likely to fall further. Resistance is where investors believe an asset’s valuation is so high that it’s not likely to climb further.
Position traders use chart patterns and technical indicators like Fibonacci retracements to determine where these invisible barriers lie.
When a stock nears resistance, it’s a strong sign that a reversal may be on the horizon. As a position trader, this is a signal to take out a short position. Conversely, when a stock nears support levels, it’s a strong signal to take out a long position to take advantage of the upward reversal.
Breakout Trading Strategy
A breakout happens when an asset’s price climbs above previous resistance levels (bullish breakout) or falls below previous support levels (bearish breakout). Traders of all types generally see these events as trading opportunities, especially position traders.
Stocks are likely to experience dramatic upward movement as they look for new resistance levels after a bullish breakout and just as volatile downward movement as they look for new support after a bearish one. As a position trader, a bullish breakout is a signal to take out a long position, while a bearish breakout is a signal to take out a short one.
Range Trading Strategy
The range trading strategy is popular among forex and cryptocurrency traders because it works best with assets that are known for high levels of volatility but typically trade in a predictable range. The strategy works like the support and resistance strategy, with traders buying assets at the bottom of the range and selling at the top.
Pullback (Retracement) Trading Strategy
The pullback, or retracement, trading strategy is most commonly used by position traders looking for the best time to add to already profitable positions. In fact, it’s the one-time position traders concern themselves with short-term trends.
When you want to add to a profitable long position, it’s best to wait for a short-term break in the trend, when prices pull back, and try to purchase new shares at the bottom of the pullback.
If you have a short position, you’re looking for the exact opposite. At some point, the downward trend will break and prices will rise slightly. This is the time to add to your short position.
Pros & Cons of Position Trading
Position trading has become a popular way for individual investors to take a more active role in their investment portfolios, and there are plenty of perks to doing so. But there are also a few drawbacks to consider.
Position trading is an exciting way to take a more active approach to investing, but that’s not the only perk to diving into this trading style.
- Higher Returns. As a position trader, you don’t stick around for reversals, leading to fewer and smaller drawdowns in your portfolio over time. With that comes improved profitability.
- Learn More About Your Investments. As a position trader, you stay on top of the news and technical data and are always in the know when it comes to your investing dollars.
- Minimal Time Commitment. Most trading styles require you to spend several hours analyzing the market every day. You can get by with 30 minutes or less of market analysis per day as a position trader.
- Less Stress. Position trading is a lower-stress way to get involved in the market. Day traders have to worry about short-term volatility, while buy-and-hold investors may get uncomfortable holding through bear market periods. Position traders don’t concern themselves with short-term price movements, nor do they hold assets through declines, offering a less stressful way to build wealth in the market.
Position trading may sound like a great way to get involved in Wall Street. Who doesn’t want a low-stress way to take an active role in their investments while improving portfolio performance? There are a few drawbacks to consider before you sell yourself on the idea.
- You Could Miss a Trend Reversal. You don’t pay attention to short-term volatility when you position trade, so you may miss signs of a coming reversal. That’s why setting your trailing stop-loss is so important.
- Trading Comes With Risk. Position trading is one of many methods for timing the market. Unfortunately, it’s impossible to be 100% accurate when timing the market, so you’ll have to accept losing trades from time to time.
- Technical Analysis. You need at least a moderate understanding of technical analysis to be successful as a position trader. Most beginners are more comfortable with fundamental analysis or simply buying and holding low-cost index funds.
Should You Become a Position Trader?
Position trading isn’t for everyone; few investing and trading strategies are. On the other hand, if the following describes you, you may want to give the trading style a try:
- You’re Not Comfortable Being Passive. If you find it difficult to sit and watch as downtrends eat into your profitability, and you want to take a more active role in your portfolio management, position trading may help scratch that itch.
- You Don’t Have Much Time. If you’ve considered styles like day trading and swing trading but don’t have the time you need to commit to them to be successful, you may prefer the half hour or so per day it takes to manage position trading.
- Charts Make You Smile. Position traders rely heavily on chart patterns for trading signals. Although fundamental news is also important, you have to be willing to learn and employ technical analysis to be successful.
- You Want Higher Overall Returns. Some people will never be comfortable with the “slow and steady wins the race” approach to investing. If you know there are more profits to be had and you’re willing to accept a moderate risk level to reach out and grab it, position trading may be for you.
Position Trading FAQs
Any style of trading can be confusing. After all, trading in financial markets is a complex topic with several moving parts. There’s no shame if you have a few questions of your own. Find answers to some of the most common questions below.
What’s the Difference Between Position Trading & Swing Trading?
Position traders attempt to ride an entire longer-term trend from bottom to top or top to bottom, depending on if the trade is long or short. Swing traders are more interested in playing the short-term daily swings or taking advantage of the middle of the trend. Swing traders wait until a trend is clear and exit well before it reaches its peak.
What’s the Difference Between Position Trading & Day Trading?
Day traders are short-term traders that never hold a position overnight. They bank on intraday price action. Position traders take a longer-term approach to trading market trends.
How Can Beginners Start Position Trading?
Start by putting together the right tools. At the very least, you need a solid brokerage, stock screener, trading simulator, and source for your stock charts. Next, learn about the different position trading strategies and choose the one that fits you best.
Use a trading simulator to try your hand in real-time. You might also try backtesting your strategy to see how it would have performed in the past. Once you generate simulated profits, it’s time to give real-world position trading a shot.
Position trading is an exciting way to increase your portfolio’s potential with a mix of fundamental and technical analysis. It gives you a way to actively learn more about your investments while avoiding many of the risks that come with shorter-term trading styles.
But no trader is perfect. You will make bad trades from time to time. However, you can limit your losses by effectively using stop-loss orders and reduce your loss rate by properly researching and analyzing your trades and staying on top of the data throughout the course of the trade.