What is Position Trading?
Every trader or investor dreams to time the market, they wish to take a position that gives maximum profit and minimize the losses. It is a well-known fact that timing the market is impossible even with the most detailed research, strong analytical skills, and years of experience. But, some traders make the most out of the market by following a technique called Position Trading.
Position Trading is a long term investing approach which follows the strategy of buy-and-hold for months or even years. This strategy ignores short term price movement and focuses on the growth in the long term. Therefore, it differs from all the trading strategies.
Traders who follow Position Trading strategies are known as position traders. In the market, going with this trend can reap great profit-making opportunities. Position Trading runs on the principle of buying and holding stocks based on a trend or a theme that is expected to boom soon, and when the trend is at its peak and the industry is seeing substantial growth, the stocks are sold off to gain profits.
How is the trend identified?
A position trader identifies the trend in the market or the economy and invests in the stocks of those companies accordingly. These trends can be sector-specific, seasonal or even long term trends. A few of the examples of such trends can be expanding demand for electric vehicles, renewable energy generation, etc. Such trends are based on multiple factors which can be identified through various tactics.
The trader generally uses multiple tactics to identify the trend like technical and fundamental analysis to understand the market sentiment. Another major source of trend identification lies in macroeconomic factors. Apart from these three, historical prices, price changing patterns and other data points are also used to identify the trends.
Passive Investors vs. Position Traders
Few learners misunderstand Position Trading as a part of investing or passive wealth creation, but it is not true. The buy-and-hold strategy is followed by investors who are looking for some long term gain and capital growth while Position Trading refers to keeping an eye on the market regularly to analyze the trends. A positional trader may invest for the long term depending upon the time for a trend to reach its peak, but they keep a sharp watch on the market to take or exit at the right time.
Advantages of Position Trading
Position Trading strategy is considered as one of the best strategies for many reasons. When a trader knows about the plausible chances of a trend to pick up soon, they are more likely to more money and maximize the gains. No trend is probably for a short term that is bound to fade in just days or weeks, it generally lasts for months or decades. Thus, there is no need to create short term strategies to hedge against the other bets in the market.
This is also a major advantage as it gives mental peace and allows one to focus on other aspects like transactional activities that require attention. Very little energy is wasted behind the research aspect due to the availability of advanced tools that give the gist of the market within minutes. Position Trading can surely be referred to as a hybrid strategy as it comes with peace of investing and gains of trading in a few cases.
Limitations of Position Trading
Position Trading is relatively a long term trading concept. A huge amount of capital is blocked until the trend starts to see its peak. Multiple trends can hit the market at the same time, which demands a pool of capital available to cash on such opportunities. Though the price fluctuations generally occur in the short term, there can be a huge washdown of capital in case of major price changes.
Predicting the next movement of the market is difficult, therefore one wrong move and the trader can lose all the money. Maintaining patience and taking positions at the right time are two crucial aspects of Position Trading. A trader losing it can lead to huge losses, both monetarily and timewise. The risks involved are much higher here, as there are chances of a trend not getting well to its peak or being ahead of its time.
To summarize, Position Trading is a tool to gain good returns by capitalizing on the trend based on the proper analysis and identification of the trend potential.
Frequently Asked Questions Expand All
A position trader can earn crores if invested at the right time with proper analysis of trends and some patience. There have been instances when traders maintained their positions for even a decade, but it gave them substantial returns for it.
Position Trading is a good strategy to implement when the market is on a bull run. It can also be used when the macroeconomic factors are indicating the growth of a particular sector or overall growth of the economy and nation.
Position Trading strategy focuses on long term price movement and is highly interested in the market with narrow price bands and properly analyzed trends rather than fluctuating price bands with uncertain market movements.