Various strategies and techniques can be used when investing. Position trading is one technique that can be used when you buy assets. It involves identifying trends and holding for a medium to long period. In this article, we will discuss everything you need to know about position trading.
How long do you hold onto investments? It can be a tricky question to answer and can depend on a multitude of factors. One technique is known as position trading and it involves holding your assets for a longer period. Below, we present a must-know guide on position trading for beginners.
Position trading
Position trading means that when you buy into an investment, you hold the position for a long period. Position traders are the opposite of day traders, who must watch markets and make multiple trades in a day. They will hold for a long period and wait for all stocks they have purchased to accrue value. Many people define position traders as those who follow trends. The belief is that when a trend takes place, it continues for some time and should be followed.
However, it is different from a buy-and-hold investor. These traders will buy and hold it for an even longer period, usually for years and years. The position trader is waiting for the end of the trend, so they can spot it and close the position. A swing trader is also situated between a position trader and a day trader. They hold investments for weeks and months.
Successful position traders will use market trends and patterns to identify when to buy and sell, along with technical analysis. Many will use stop-loss orders so they know when to cash out.
Ways to position trade
The key to position trading is holding positions for long periods. It is not concerned with volatile markets. Within it, there are several further options you must consider, depending on the asset you buy.
Share trading
Share trading is quite favorable to a position trading strategy. It involves buying shares, which are typically less volatile than other assets. The key is to identify a company that has a good, long-term future, by looking at the company itself, the market, and its industrial sector. If you think all looks positive, you may buy with a plan of selling in a year or more.
Commodity trading
Commodities are also more stable than other asset classes. If they do fluctuate, then they often return to a stable foundation not long after. This makes them good for positional traders, who can try to identify forthcoming trends over a year and capitalize on them.
Indices trading
Indices are one of the most preferred asset classes for positional traders. As they are a group of assets grouped by a common theme, thus it makes it easier to predict trends with them. For example, they may be part of the same company or in the same country. Therefore, if that country seems to be doing well economically you may wish to open a positional index trade.
Currency trading
Currency trading is not generally suited to positional trading. It is volatile and must be traded in high numbers. As a result, most of it is done by day traders.
What are the risks of position trading?
All investments carry a high level of risk. Position trading tends to have a lower threshold than most, as holding for a long time means it is easier to ride out the troughs. However, it still does have some drawbacks you should be aware of before investing.
The first of these is a trend reversal. You may spot a trend and get it wrong. Once the trend reverses, large losses can occur. It is then up to you to decide if the trend will ever take off again and keep the position, or cut your losses and exit.
Low liquidity is also a factor associated with position trading. Capital becomes locked into trades for very long periods, as opposed to trades where capital is constantly coming in and going out.
Fundamental and technical analysis
To identify opportunities for position trending, people will adopt a fundamental or technical analysis, or in some cases both. Fundamental analysis involves holding assets for a longer period, usually with a technique known as stock picking.
Technical analysis works on two levels. First, it will try to pick out trends and see how long they will last and when they should be exited. This ties into their second aim, which is to spot trends in prices of assets that can return a positive outcome.
Positional trading tends to carry less risk, though all investments have a fundamental risk inherent in them. It is also good for people who don’t have the time to devote to looking at markets and changes regularly like day traders or swing traders do. If this suits your level of risk and time constraints, then position trading could be the right choice for you.
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