If you’re looking for a way to invest in the stock market with a strategy that doesn’t require constant monitoring, positional trading might be the right approach for you.
This method is all about making decisions based on long-term market trends, rather than getting caught up in short-term price swings.
In this guide, we’ll explain what positional trading is, how it works, and why it could be a great option for investors seeking a more relaxed, less stressful trading strategy.
What Is Positional Trading?
Positional trading is a type of stock trading where traders hold positions for a longer period, typically weeks or months, in contrast to day trading, where trades are made within a single day. The goal of positional traders is to make money from big price movements over time, rather than from small, daily fluctuations.
The key difference between positional trading and other forms of trading, like day trading or swing trading, is the focus on long-term trends. Positional traders are looking for significant price moves that happen over weeks, months, or even longer, which allows them to take advantage of these bigger shifts without worrying about the daily ups and downs of the market.
Key Concepts in Positional Trading
To be successful at positional trading, there are a few important concepts to understand. Here are the basics:
Long-Term Focus
Unlike traders who focus on short-term price movements, positional traders concentrate on the bigger picture. They look at how the stock market or specific stocks are trending over a long period of time.
This allows them to make decisions based on fundamental analysis (looking at the overall health of a company or the market) and technical analysis (examining price patterns on charts) rather than reacting to every small price change.
Identifying Price Patterns
A huge part of positional trading is recognizing price patterns on stock charts. These patterns can indicate whether a stock is likely to continue moving in the same direction or if it’s about to change course.
By learning to spot these patterns, positional traders can time their entries and exits more effectively.
Common Price Patterns in Positional Trading
Here are a few common price patterns that positional traders look for when deciding to buy or sell stocks:
Head and Shoulders
This is a bearish pattern, which means it signals that a stock’s price may soon start falling. It forms when a stock makes a peak (the “head”) followed by two smaller peaks (the “shoulders”) on either side.
If the stock price falls below a certain level (called the “neckline”), it’s a sign that the price could continue to decline.
Inverse Head and Shoulders
This is the opposite of the head and shoulders pattern and indicates a potential upward movement in the stock price. It forms when the stock price drops to a low point (the “head”) and then rises to form two smaller lows (the “shoulders”).
A breakout above the neckline can signal that the stock price will start rising.
Cup and Handle
This is a bullish continuation pattern, meaning it suggests the stock price will continue to rise after a temporary pullback. The “cup” is a rounded bottom that forms after a downward trend, and the “handle” is a slight dip before the stock breaks above the resistance level, indicating that the price could go higher.
Double Top
This is a bearish pattern that forms when a stock price hits a peak, drops, then rises to the same level again, and then drops once more. If the stock price breaks below the level of support (where it previously dropped from), it signals that the stock could continue to fall.
Double Bottom
This is the opposite of the double top and suggests that a stock’s price may rise. It forms when the stock hits a low point, rises, then drops again to roughly the same level before breaking through resistance and moving higher.
Advantages of Positional Trading
Positional trading offers several benefits, especially for those who prefer a more hands-off approach to the market. Some of the main advantages include:
Less Time Spent Watching the Market
One of the key benefits of positional trading is that it doesn’t require constant monitoring of the markets. Once you’ve entered a trade, you don’t have to check prices every few minutes. This is ideal for people who don’t have the time or inclination to watch the stock market all day.
Reduced Impact from Short-Term Volatility
The stock market is constantly changing, with prices rising and falling in the short term. However, by focusing on long-term trends, positional traders can avoid being affected by small, daily fluctuations. This helps reduce the stress that comes from worrying about daily market movements.
Opportunity for Larger Profits
Because positional traders are looking for big trends over weeks or months, there’s a potential for larger profits than with short-term trading styles. By identifying trends early, traders can ride them for a long period of time, which can be more profitable than trying to capitalize on smaller, short-term moves.
Risks of Positional Trading
While positional trading has many advantages, it’s also important to be aware of the risks involved. Here are a couple of the main risks to consider:
Capital Lock-In
Since positional traders hold positions for a longer period of time, their money can be tied up in trades for weeks or even months. This means that if you need access to your capital quickly, you might have to sell your positions earlier than you’d like.
Liquidity Risk
If you’re trading stocks with low trading volume, it might be harder to buy or sell shares at the price you want. This is especially true if the market is moving against you. If you need to exit a trade quickly, low liquidity can make it more difficult to do so.
Conclusion: Is Positional Trading Right for You?
In summary, positional trading is a great strategy for investors who want to make money from longer-term market trends, without having to monitor their trades constantly. By focusing on major price movements and recognizing important price patterns, positional traders can potentially earn significant profits while avoiding the stress of daily volatility.
However, it’s important to keep in mind that this approach requires patience and an understanding of the risks involved, such as capital lock-in and liquidity issues.If you’re someone who wants to take a step back from the hectic pace of short-term trading, positional trading could be a rewarding way to invest in the stock market.
By using technical analysis to identify trends and price patterns, and staying focused on the long-term, you could achieve consistent, profitable results over time.
