Positional Trading: Meaning & Strategies
Trading in the stock is a popular way for people to engage with the stock market. Many traders and investors participate daily to improve their skills and try their luck. Those who have knowledge can make significant profits, while others who came and gamble may end up losing money.
Traders in the stock market usually choose a trading strategy based on their financial goals, preferences, and investment timelines. There are two main types of trading: short-term and long-term. It can be tough for beginners to know which one is right for them.
To make it clear, let’s take a closer look at positional trading.
What is Positional trading?
Positional trading is a long-term investment strategy where traders hold onto their positions for several months or years.
They follow the “buy-and-hold” philosophy and are not concerned about short-term price fluctuations or daily news unless it significantly impacts their long-term perspective on the position’s value in the stock market. Traders who use positional trading are called “position traders”. They can make profits by following the latest market trends.
This method involves buying and holding stocks based on a trend or theme that is expected to grow soon. Position traders then sell the stocks for a profit when the trend reaches its peak and the industry sees significant growth.
These traders aim to capture the most profitable part of a long-term trend when an asset is on the move. Changes in the underlying fundamentals, such as the economy or industry, can trigger a change in the price of most assets, including stocks.
However, some assets may remain stable for a while before they start to move due to significant changes in their own fundamentals or the industry’s.
Position traders differ from day traders in that they do not trade frequently. They typically make fewer than ten transactions per year.
Positional Trading Strategies
Position traders do not have set strategies to follow, but they can choose their trades based on their skills. Many position traders are skilled in technical analysis, and some also make an effort to master fundamental analysis to improve their insights’ reliability.
Some methods that position traders may use include:
1. Fundamental Analysis
Fundamental analysis is a method that focuses on the factors that influence an asset’s price. This approach aims to identify a structural change in a company’s fundamentals and considers only qualitative factors. By using publicly available information, fundamental analysis assesses the value of a stock or any other investment.
To determine a company’s underlying value and potential for future growth, fundamental analysis considers data such as sales, profits, future growth, and return on equity, profit margins, and other factors. This information can be found in a company’s financial statements.
Analysts typically evaluate the overall state of the economy, the industry’s competitiveness, and then each firm’s performance to determine a stock’s reasonable market value.
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2. Technical Analysis
Technical analysis is a strategy that uses charts to determine the long-term trend of an asset’s price. Stocks, bonds, futures, and currency pairs are some examples of tradable assets that can be forecasted using technical analysis based on the dynamics of supply and demand.
Some people believe that technical analysis only involves examining supply and demand dynamics as they appear in shifts in a security’s market price. Analysts who use technical analysis often focus on price movements, but they may also monitor other variables like trade volume or open interest levels. This strategy considers only market conditions and ignores basic factors.
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3. Demand and Supply
Traders use demand zone and Supply zone lines to visualize the range in which the asset price is moving. Demand zones where a downturn is expected to pause because demand is concentrated, while Supply zone occurs when a temporary pause in an uptrend is anticipated due to a concentration of supply. Demand zone sets a lower limit for the price, while Supply zone sets an upper limit.
Traders use historical data to identify the assets demand and Supply levels, considering periods of significant gains and losses as a predictor of future market changes. When a breakout occurs, the roles of demand zone and Supply zone are altered, and traders analyse prior demand and supply levels to understand how the asset price has changed.
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4. Pullback strategy
Pullbacks occur when prices are falling, not rising. A pullback is a temporary counter-trend movement against the primary trend. For example, in a bullish trend, a pullback would be a temporary decline in price before the price continues to rise.
Traders can use pullbacks to enter the market at a lower price, with the expectation that the trend will continue and the price will eventually rise again. The idea is to buy low during a pullback and sell high when the trend continues.
Positional traders understand that there are always risks involved in trading, and they use risk management strategies to minimize potential losses. Stop losses are used to automatically sell a stock when it reaches a certain price, which limits the amount of money a trader can lose on a trade. Capital allocation rules are used to determine how much money to invest in each trade based on the trader’s overall portfolio value.
Ultimately, the success of a positional trader depends on their ability to accurately interpret market data and make timely decisions based on that information.
5. Technical + Fundamental Strategy
A techno-fundamental approach combines both technical and fundamental analysis to make trading decisions. Technical analysis involves using charts and price patterns to identify potential trends, while fundamental analysis involves evaluating the underlying economic and financial factors that impact the asset’s price.
By combining these two approaches, traders can have a more comprehensive view of the asset’s potential for growth or decline. They can use technical analysis to identify potential entry and exit points, and fundamental analysis to determine whether the asset’s price is supported by the underlying economic and financial factors.
By practising of both analysis trader can achieve more accurate results.
Successful trading requires the use of a well-defined strategy, appropriate risk management techniques, and a deep understanding of the market dynamics. Positional trading, as opposed to day trading, is a popular approach for traders who seek to take advantage of long-term market trends. This approach is based on the assumption that trends persist over time and traders use both fundamental and technical analysis to identify and trade market opportunities. However, it is important to note that there is no one-size-fits-all strategy for trading and traders must develop their own approach based on their skills, experience, and risk tolerance. By utilizing appropriate risk management techniques and a sound trading plan, traders can increase their chances of success in the market.