In positional trading, people buy or sell investments and hold them for a long time, like months or even years. Instead of trying to catch small ups and downs in price, they aim to make money from big market movements over time. Think of it like waiting for a wave instead of trying to jump on every tiny ripple.
What is Positional Trading?
The main goal of positional trading is to profit from more significant market movements. Let us say you invest in a business that has a lot of room to grow. You would not pay attention to daily fluctuations in price when using positional trading. Rather than that, you would hang onto those shares for weeks, months, or even years, hoping that the company's total value (and thus the share price) would rise sharply.
One well-known application of this tactic is holding your share and selling it when the price rises. Instead of attempting to predict short-term price swings, you are placing a wager on the company's and the market's long-term viability.
Should you trade with a positional trading strategy?
Positional trading is best suited for investors with a higher risk tolerance because it calls for a methodical and patient approach. Here's why:
- Long-term commitment: Positions are held for extended periods, meaning your money is tied up and potentially exposed to market fluctuations.
- Volatility tolerance: You'll need to be comfortable with price swings along the way, trusting your analysis and holding through temporary dips.
This strategy aligns well with investors who:
- Have a long-term outlook: They prioritise building wealth over time and don't need immediate access to their funds.
- Can handle market ups and downs: They understand that short-term volatility is natural and focus on the bigger picture.
If you prioritise short-term gains or struggle with managing emotions during market swings, positional trading might not be the best fit.
Benefits of Positional Trading
When you trade with a positional trading strategy, you have the following benefits:
- Position trading is a longer-term strategy with the potential for larger returns.
- It reduces stress by requiring less frequent monitoring.
- Traders have more time to look for opportunities.
- It includes identifying stocks, currencies, or other assets for trading.
- It focuses on longer-term earnings rather than constant monitoring.
Example of Positional Trading
Now you know what positional trading is; it is a strategy where traders hold positions for longer periods. Now, let's see an example to understand how it really works:
Suppose Anurag is a positional trader who analyses stocks based on both fundamental factors (like company earnings, industry trends, and economic outlook) and technical analysis (such as chart patterns and indicators).
He focuses on identifying stocks with strong growth potential over the medium to long term and starts trading with a positional trading strategy. Anurag followed these steps in his trading journey:
- Identifies XYZ Company, a mid-cap stock in the technology sector, which has recently shown strong quarterly earnings growth.
- Examines the sector's outlook and believes it has favourable long-term prospects due to increasing demand for its products in emerging markets.
- Analyses XYZ's stock chart using technical indicators like moving averages and relative strength index (RSI).
- He identifies a bullish trend where the stock price has been steadily increasing and is currently consolidating near a key support level.
- Based on his analysis, Anurag decided to enter a long position in XYZ stock at Rs. 1,000 per share, anticipating further upside potential.
- He sets a stop-loss order at Rs. 950 to manage risk in case the trade goes against him.
- Anurag monitors XYZ Company regularly, reviewing quarterly earnings reports, industry news, and technical chart patterns.
- He adjusts his stop-loss and profit target levels as the stock price moves in his favour.
- After holding the position for several weeks, he saw XYZ stock appreciating Rs. 1,200 per share.
- He decides to exit the trade, locking in a profit of Rs. 200 per share, or 20% return on his initial investment.
From the example of Anurag, you've learned how he used his analysis and tactics of positional trading to earn profit from his initial trade.
FAQs
How to identify the trend when using positional trading?
To find out the trend during positional trading, you need some technical analysis. A thorough analysis of the market helps you know the direction of your trade. Some tools to help you with that are moving averages, RSI, Bollinger bands, and MACD.
What is the 50-day moving average for positional trading?
With the 50-day analysis strategy, you can find out the constant price changes. If the stock prices are going up after its 50-day streak, it is a bullish trend, and you can start positional trading as the prices might go up at their own pace.
Does positional trading possess any limitations?
Positional trading have some limitations, some of them are: large capital for trading, limited opportunities to trade and exposure to the market volatility.
How much money should you put in a position trade?
There's no one-size-fits-all answer to how much money you should put in a position trade. It depends on several factors, including: portfolio size, risk tolerance and stock's volatility.