If you’re new to stock trading and find it hard to keep up with the fast-paced changes in the market, positional trading might be a good strategy for you. This trading method allows you to take a long-term approach to investing, without having to watch the market all day.
In this guide, we’ll explain what positional trading is, how it works, and how it can benefit you as a trader.
What is Positional Trading?
Positional trading is a strategy where traders buy and hold stocks, commodities, or other assets for a longer period, typically from a few weeks to several months or even years. The idea is to benefit from long-term market trends by holding onto an investment until its price increases significantly.
Unlike day trading or swing trading, which focus on short-term price movements, positional traders focus on the bigger picture, using a mix of fundamental analysis and technical analysis to make decisions.
This strategy requires patience, as traders wait for the right time to sell for the maximum profit.
In short, positional trading is about buying assets that you believe will grow in value over time, and holding them until the price has risen enough to make a good profit.
Key Benefits of Positional Trading
If you’re considering positional trading, there are several advantages that make it an appealing choice:
- Lower Transaction Costs: Since positional traders make fewer trades, they pay fewer transaction fees and commissions. This helps keep more of your profits, as you’re not constantly paying for each trade.
- Less Impact from Daily Market Fluctuations: One of the biggest advantages of positional trading is that you’re not concerned with every small market fluctuation. Unlike day traders who are affected by minute-to-minute price changes, positional traders focus on long-term trends. This reduces the emotional stress of reacting to daily market noise.
- Less Time-Intensive: Positional trading requires less time than day trading, which demands constant monitoring of the market. With positional trading, you can take a more relaxed approach to managing your trades. This is ideal for those with busy schedules or those who want a more hands-off investment style.
- Reduced Market Stress: Since you’re focusing on long-term trends rather than short-term swings, you don’t have to worry about market manipulations or sudden, dramatic price movements. This helps reduce stress and allows for a calmer trading experience.
How to Use Positional Trading Strategies
To succeed in positional trading, it’s important to understand both technical analysis and fundamental analysis. These tools help you make informed decisions about when to buy and sell.
Fundamental Analysis
The first step is to study the fundamentals of a company or asset. This involves looking at things like:
- Financial Statements (income, balance sheet, cash flow)
- Earnings Growth (how well the company is expected to perform in the future)
- Industry Trends (the overall health of the industry the company is in)
If you find a company with strong fundamentals that is undervalued in the market, it might be a good candidate for a long-term position.
Technical Analysis
Once you’ve found a good asset based on its fundamentals, the next step is to use technical analysis to figure out the best time to enter and exit the market. This involves looking at price charts and identifying key patterns, support levels, and resistance levels.
For example, if a stock price falls to a support level (a price where the stock tends to bounce back), this could be a great time to buy. Technical analysis helps you make decisions based on past price movements, helping you predict where prices might go in the future.
Popular Positional Trading Strategies
Here are a few strategies that can help you succeed in positional trading:
Support and Resistance Trading
Support levels are prices where a stock tends to stop falling, while resistance levels are prices where a stock struggles to go higher. By identifying these levels, you can decide when to enter or exit a trade based on where the price is likely to move next.
50-Day Moving Average
One common technical tool used by positional traders is the 50-day moving average. This is simply the average price of a stock over the past 50 days.
If the price is above the 50-day moving average, it suggests that the stock is in an upward trend. This can help you decide when to hold onto your position for a longer time.
Pullback and Retracement Trading
During an upward trend, stocks can sometimes experience a temporary price drop, known as a pullback or retracement. These drops can present a buying opportunity, as they often happen before the stock continues its upward movement. Traders use these moments to buy at a more favorable price.
Breakout Trading
Some stocks tend to bounce between certain price levels—known as consolidation. When a stock breaks through a resistance level (the price point where it has been struggling to rise), this can signal that the price will continue to rise. This is known as a breakout, and it’s a good time to enter the market.
Sector Rotation Strategy
Sector rotation is about moving your investments between different sectors of the economy based on the current economic cycle. For example, you might invest in defensive sectors (like utilities or healthcare) during economic downturns, and in cyclical sectors (like technology or consumer goods) during recoveries. This strategy helps you optimize your returns in different market conditions.
By focusing on long-term trends, positional trading allows traders to invest with patience and a strategic approach. Whether you’re just getting started or looking to refine your skills, understanding the key concepts of fundamental analysis and technical analysis will help you make informed decisions and potentially grow your investments over time.
Frequently Asked Questions
What Timeframe is Best for Positional Trading?
The ideal time frame depends on your trading strategy and goals. Common timeframes for positional trading include daily charts for holding positions for weeks or months, or even weekly charts for long-term positions that last for years.
Is Positional Trading Better Than Intraday Trading?
Whether positional or intraday trading is better depends on your personal preferences. Intraday trading requires quick decision-making and constant monitoring of the market, while positional trading is more relaxed and focuses on long-term trends. If you don’t have the time or interest in managing trades every day, positional trading might be a better fit.
Is Positional Trading Risky?
Like any investment strategy, positional trading comes with risks. One key risk is the possibility of a trend reversal, where the market moves in the opposite direction of your position. However, positional trading tends to be less risky than intraday trading since it’s based on long-term trends, making it less susceptible to daily price fluctuations.
