The concept of “position trading” – long-term trades, to be closed at a distant date, instead of trying to predict market direction – has recently become popular outside traditional Wall Street circles.
Many investors are looking into it as an alternative strategy for their trades which enables them to build up gains slowly but surely.
Most importantly, because they hold their positions over time rather than day trade frequently, they incur far fewer costs associated with buying and selling shares.
Position trading is a style of stock market investing that investors can apply to benefit from fluctuations in the price of an asset over time.
It is different from day trading and other types of short-term trading due to its longer holding periods. Investors tend to hold the same position for days, weeks or even months at a time.
Day traders usually keep positions open for minutes, hours or sometimes even seconds before closing them again.
While this might sound like a more risky option than position trading, it also allows day traders with high capital requirements to make large profits with relatively little investment compared to long-term investors.
Position traders aim for smaller returns on their holdings, and they accept less volatility in the hope that they will make steady profits in the long term.
The types of positions that investors can open depend on the stock, options or futures contract they are trading, but all three cases will allow them to either buy or sell an asset.
Day traders regularly close their position before the end of the day. While some may keep it open overnight, this exposes them to greater levels of risk due to increased volatility in shorter time frames.
Position traders aim for smaller returns on their holdings and accept less volatility to make steady profits.
An investor looking at position trading must have a relatively large sum of money to invest.
Buying and selling more significant amounts takes more time than day trading, which requires comparatively tiny amounts.
You must put resources into the proper education of a position trader as it is an entirely different style of trading from day trading.
They have to learn fundamental technical analysis, how the market works, and what external factors influence their investments.
You can apply different strategies for position trading. Still, most will involve looking at supply and demand levels on certain assets – these will typically create support and resistance levels on charts, allowing investors to predict future price changes.
It is important to note that just because an asset’s price has fallen recently does not mean it will continue to fall; often, the downward trend reverses itself, so checking past data on the stock or commodity in question is essential.
Putting a position trade in place takes more time than day trading, but it can be done in intervals of days, weeks or months, depending on the investor’s timeframe.
Buying or selling
One of the essential things for any investor to consider when opening a new position is whether they are buying or selling.
The answer will determine everything about their strategy – for instance, if an investor buys into stock, they must only sell that stock at a price higher than what they bought it at.
However, if an investor sells the same stock, they need to ensure that they get more money than they initially paid out.
Like day trading, there are ways to mitigate risk and reduce losses if one makes bad trades – stop-loss orders prevent investors from losing too much capital even if their investments take a turn for the worse.
In contrast, stop gain orders ensure they get out of the wrong position before too much money is lost.
Volatility and market risk
Due to the exposure to volatility and market risk, investing in position trading requires more capital than day trading.
$100-200 on average can help you get started but if you want to grow your investment, consider opening with at least $500 – this will give you enough of a buffer against fluctuations without limiting your exposure.
For more information, link to stock options.