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Best Positional Trading Strategies

Oct. 21, 2024

Best Positional Trading Strategies

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Positional Trading: Meaning, Strategies, Pros & Cons

Content

Positional trading is a long-term investment approach that follows the buy-and-hold strategy  for long periods. If you're an investor looking to generate substantial returns from the financial markets, you must have heard of several trading styles and strategies. Positional trading is one such strategy. Let us explore what is positional trading and discuss some tips for getting started with this popular strategy.

What is positional trading?

Positional trading is a trading strategy in which traders hold their positions for an extended period, typically from several weeks to months or even years. The strategy&#;s goal is to capitalise on long-term trends in the market rather than focusing on short-term fluctuations.

Holding onto your share and selling it when its price increases is a classic positional trading example. 
 

Is position trading for you?

Now that you know the positional trading meaning, the suitability depends on your investment goals, risk tolerance, and trading style. Positional trading can be an attractive strategy for investors looking for long-term growth and willing to hold onto positions for an extended period. This approach can be less stressful than day trading, allowing you to take advantage of major market trends.

Positional stock trading strategies

Positional trading stocks involves holding positions for an extended period, typically ranging from a few weeks to several months. Here are some popular strategies used by positional traders in the stock market.

1.    Trend-following strategy: This positional trading strategy involves identifying and following long-term trends in the stock market.

2.    Growth investing strategy: Growth investors focus on stocks with the potential for high growth in the future. Positional traders who use this strategy look for companies with strong fundamentals.

3.    Value investing strategy: Value investors focus on stocks undervalued by the market. Positional traders who use this strategy look for undervalued companies with a low price-to-earnings (P/E) ratio or a low price-to-book (P/B) ratio.

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4.    Momentum trading strategy: This strategy involves buying stocks showing upward momentum in their price and selling them once the momentum starts to slow down.

Potential downsides of positional trading

While positional trading can be a profitable trading strategy, there are several potential downsides that traders should be aware of. 

1.    Long holding periods
2.    Potential for missed opportunities
3.    Greater exposure to market risks
4.    Higher capital requirements
5.    Limited flexibility

How is the trend identified?

The positional trading trend is identified using technical analysis tools that help traders to identify the long-term direction of the market. Here are some of the most commonly used technical analysis tools for positional trading trend identification.

1.    Moving Averages: Moving averages help to smooth out price data and identify trends. Traders typically use longer-term moving averages, such as the 50-day or 200-day moving average, to identify the long-term trend.

2.    Relative Strength Index (RSI): The RSI oscillates between 0 and 100 and is used to identify overbought or oversold conditions. Traders use RSI to identify bullish or bearish divergences, which can signal a trend reversal.

3.    Bollinger Bands: Bollinger Bands are a volatility indicator that uses a moving average and two standard deviations to create a band around the price. 

4.    Moving Average Convergence Divergence (MACD): MACD is a trend-following momentum indicator that shows the relationship between two moving averages. Traders use the MACD to identify trend changes and to confirm a trend&#;s strength.

5.    Fibonacci Retracement: Fibonacci Retracement is a technical analysis tool to identify potential support and resistance levels in a trend. Traders use the Fibonacci levels to identify potential trade entry and exit points.

Pros of positional trading strategies

The positional trading strategy offers several advantages for traders, including the following.

1.    Positional trading strategies take advantage of long-term trends in the market, which can result in significant profits over time.

2.    Positional traders make fewer trades than other traders, which can help reduce their transaction costs. This is because they hold their positions for an extended period, reducing the need to buy and sell frequently.

3.    Positional trading requires traders to have a long-term outlook and to avoid getting caught up in short-term market fluctuations. This can help reduce stress and emotional involvement, leading to better decision-making and more consistent trading results.

4.    Positional trading allows traders to have more flexibility in their trading schedule. They do not need to monitor the market constantly or make frequent trades, which can be convenient for traders with other obligations or commitments.

5.    Positional traders are less vulnerable to market manipulation than other types of traders. This is because they hold their positions for an extended period, reducing the impact of short-term market fluctuations or sudden market moves caused by market manipulation.

Cons of positional trading strategies

Positional trading strategies can also have some potential downsides and risks for traders.

1.    Positional traders need significant capital to hold their positions for an extended period. They need to maintain their margin requirements and have enough capital to sustain potential losses.
2.    Holding positions overnight or for an extended period exposes traders to overnight risk. Unexpected news or events can cause significant market moves, resulting in potential losses.
3.    Positional trading strategies focus on long-term trends, which can limit the number of trade opportunities available. This can make it difficult for traders to find profitable trading opportunities, especially in volatile markets.
4.    Positional traders need to have a long-term outlook and hold their positions for an extended period, which can limit their flexibility in trading. This can make it difficult for traders to adjust their positions quickly to changing market conditions.
5.    Positional traders may miss out on short-term trading opportunities due to their long-term vision.
 

Passive investors vs. Position traders

Passive investors and position traders are two different investment approaches. Passive investors invest in low-cost index funds or ETFs that track the market's performance and hold their investments for years. They have a lower risk tolerance and accept lower returns in exchange for a more stable, diversified portfolio.

Position traders, on the other hand, use technical analysis and other tools to identify short- to medium-term market trends and make trading decisions accordingly. They are willing to take on more risk for the potential of higher returns, require a significant amount of time and effort to analyse the market, and are more actively involved in trading decisions.
 

Positional trading strategies

Three basic positional trading strategies are as follows.
&#;    Technical strategy
&#;    Fundamental strategy
&#;    Techno-fundamental strategy
 

50-day moving average trading

The 50-day moving average is a technical analysis tool traders use to identify short-term trends in the stock market. It is calculated by averaging the closing prices of a stock over the past 50 days, with each day's price given equal weight. When a stock's price crosses above its 50-day moving average, it is considered a bullish signal, indicating a potential upward trend in the stock's price. Conversely, when a stock's price falls below its 50-day moving average, it is considered a bearish signal, indicating a potential downward trend.

Support and resistance trading

Support and resistance trading is a popular technical analysis strategy traders use to identify potential buying and selling opportunities in the financial markets.

Support refers to a price level where buying pressure has historically been strong enough to prevent the price from falling further. On the other hand, resistance refers to a price level where selling pressure has historically been strong enough to prevent the price from rising further. Traders use these levels to identify potential entry and exit points.
 

Trading breakouts

Trading breakouts are a popular strategy used by traders to capitalise on significant price movements in the financial markets. A breakout occurs when the price of security breaks through a significant support or resistance level, signalling a potential change in trend. 

Traders may use technical analysis tools, such as trend lines and moving averages, to identify potential breakout points. Once a breakout occurs, traders may enter a long or short position, depending on the direction of the breakout.

Pullback and retracement strategy

The strategy involves identifying an uptrend or downtrend in a security's price and waiting for a temporary pullback or retracement against the trend. Once the pullback occurs, traders may enter a long or short position, respectively, in anticipation of the trend continuing.

The pullback and retracement strategy can be useful for traders to enter positions with lower risk, as they are entering the market at a more favourable price point than buying or selling at the top or bottom of a trend. However, traders should use proper risk management techniques, such as setting stop-loss orders, to minimise losses if the trend fails to continue.
 

Limitations of position trading

Position trading, like any trading strategy, has limitations and drawbacks that traders should be aware of.

&#;    Limited trading opportunities
&#;    Large capital requirements
&#;    Exposure to market volatility
&#;    Limited flexibility
&#;    Long-term commitment
 

Conclusion

Positional trading is a strategy that requires patience and discipline but can be profitable for traders willing to hold positions for an extended period.

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