What is Position Trading? Strategies, advantages and disadvantages

If you have ever thought about trading stocks but worry about watching prices all day, positional trading might be a suitable solution for you. Unlike day trading, positional trading allows you to adopt a more long-term approach to trading. In this article, we will take a closer look at positional trading, what it means, along with some easy-to-follow strategies, and while also understanding the pros and cons of positional trading.

• Table of contents

1. What is position trading?
2. How is the trend identified?
3. Passive investors vs. position traders
4. Advantages of position trading
5. Limitations of position trading
6. Positional stock trading strategies
7. Potential downsides of positional trading
8. How to trade using positional trading strategies

What is position trading?

Positional trading means buying stocks and holding them for weeks, months, or even years, to benefit from long-term price movements. Unlike day traders who buy and sell within a single day, positional traders patiently wait for bigger price moves.

In simple terms, this is how positional trading works:

• You buy a stock expecting its price to rise steadily over time.
• You hold the stock until your target price is potentially reached.
• Trades usually last from several weeks to several months or longer.

Positional trading is a style that fits traders who have a longer-term view of markets and do not want to make daily decisions based on constant tracking.

Read Also: Stock Market Trading: Meaning, Types, and Historical Context

How is the trend identified?

To succeed in positional trading, identifying the trend is key. Here's how traders find trends:

1. Moving averages

• Simple lines that show the average price of a stock over a specific period — say 50 days or 200 days.
• Positional traders often use the 50-day (short-term trend) or 200-day (long-term trend) moving averages.
• If the price consistently stays above the moving average, it usually signals an uptrend. If it stays below, it may suggest a downtrend.
• Traders often watch for crossovers (like the 50-day moving above the 200-day), which can signal a trend reversal.

2. Trendlines

• These are straight lines drawn on a chart by connecting a series of higher lows (for uptrend) or lower highs (for downtrend).
• They help visually spot the stock’s direction and can also act like dynamic support or resistance levels.
• A break of a well-established trendline can hint at a potential shift in trend.

3. Support and resistance

• These are price levels where the stock tends to pause or reverse.
• Support is where the price tends to bounce back up (buyers step in). Resistance is where the price often struggles to move higher (sellers take over).
• Traders look for breakouts above resistance or bounces from support to time their entries and exits.

Passive investors vs. position traders

Both passive investors and positional traders hold stocks for longer durations. However, here's the main difference:

• Passive investors
  • Invest regularly (like SIP in mutual funds).
  • Don't usually sell unless financial goals are to be met.
  • Often don't track markets actively.
• Position traders
  • Choose stocks carefully based on price trends.
  • Actively track trends and decide when to sell.
  • Aim to profit from specific market movements.

Advantages of position trading

Clearly understanding the pros and cons of positional trading can help you decide if it's the right strategy for you. The following are some advantages:

• Less time consuming: You don’t have to watch the market every minute, as is the case with day traders.
• Fewer trades: Fewer trades reduce overall brokerage fees and taxes.
• Potential for higher profits per trade: Bigger moves translate into potentially larger gains.
• Less emotional pressure: Easier to stay calm and rational, compared to day trading.
• Fits busy schedules: Perfect if you have limited time to monitor markets.
• Trading signals: You trade based on clear trends, not temporary price swings.

Read Also: What is Intraday Trading? Meaning, Types and Benefits

Limitations of position trading

While positional trading has clear advantages, learning about the limitations of position trading is equally important:

• More patience required: You must wait patiently for potential profits; it does not result in quick gains.
• Risk of trend reversals: Sudden market events or news can change long-term trends quickly.
• Higher capital requirement: Holding stocks longer means investing money for extended periods.
• Potential missed opportunities: While holding a stock, you might miss other short-term profitable trades.

Positional stock trading strategies

Here are some simple positional trading strategies:

1. Trend-following strategy

• Identify clear market trends using moving averages.
• Buy when prices stay above the moving average.
• Sell when prices fall below the moving average.

2. Breakout trading

• Wait for the price to break through resistance (upwards) or support (downwards).
• Buy stocks that breakout above a resistance level.
• Sell or short stocks breaking below support.

3. Pullback trading

• Buy stocks during temporary price drops within an overall uptrend.
• Allows you to buy strong stocks at discounted prices.
• Confirm the trend clearly before trading.

4. Using fundamental analysis

• Positional traders often pick fundamentally strong companies.
• Analyse financial health, earnings growth, and industry position.
• Strong fundamentals increase confidence for longer holding periods.

Potential downsides of positional trading

It's also important to acknowledge a few potential downsides of positional trading:

• Unexpected market events: Sudden events can impact your position negatively.
• Long-term commitment: Your money stays invested for longer, reducing liquidity.
• Requires discipline: Holding positions long-term can be emotionally challenging, especially during market downturns.

How to trade using positional trading strategies

Here's a simple step-by-step way to start positional trading:

• Step 1: Choose strong stocks that seem to be trending upwards according to data, indicators and research.
• Step 2: Determine clear entry points (using support, resistance, moving averages).
• Step 3: Set target prices and stop-loss clearly.
• Step 4: Buy the stock and patiently hold it until your target price or trend changes.
• Step 5: Review your trades regularly but not constantly.

While positional trading can offer opportunities for active investors, those looking for a more hands-off, long-term approach often consider mutual funds — where professional fund managers do the heavy lifting of analysis and stock selection for you.

Conclusion

Clearly understanding the meaning, key strategies and pros and cons of positional trading can help you make strategic trading decisions. Positional trading is a suitable alternative to day trading. Alternatively, mutual funds offer access to these and other sophisticated trading and investing strategies to new investors. Investment decisions are handled by investment professionals based on thorough knowledge, analysis and research.

FAQs

What is positional in trading with an example?

Positional trading means buying a stock and holding it for a longer period. For example, you could purchase a stock at the price of Rs. 2200 expecting it to potentially reach Rs. 2600 over a period of six months.

Which is better, position trading or intraday trading?

Position trading can be more suitable if you prefer less stress, fewer trades, and higher potential profits over a longer period. Intraday trading is good for potential quick gains but requires constant monitoring and carries more risk.

Which stock is most suitable for positional trading?

Stocks showing a clear long-term trend and strong fundamentals, like large cap companies, can be suitable for positional trading.

What is positional vs. swing trading?

Positional trading means holding stocks for weeks, months, or even years, focusing on bigger price moves. Swing trading involves shorter periods (days or weeks) and smaller price moves.

What is the meaning of position in the stock market?

A "position" simply means owning a stock (long position) or short selling it (short position). Positional trading involves maintaining these positions for extended periods to profit from price movements.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
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