Position Trading
Every investor and trader has some investment strategy. Some don’t want to think about it and put money periodically in one or many funds. Others go through a world of trouble visiting r/wallstreetbets to day trade and try their luck with 0DTE options, calls and puts. In this article, we will focus on position trading. It is a long-term trading strategy where traders hold stocks and other assets for extended periods, typically months or years. Generally, they place fewer than ten trades per year. Like every investment strategy, position trading has its advantages and risks. Here’s everything you need to know about position trading.
What Is Position Trading?
Position traders buy stocks for the long term and hope they will appreciate. They aren’t too concerned about short-term movements. Their strategy consists of finding a trend and riding the wave until it is likely to end. To succeed, they must find the best entry and exit points. What are some characteristics of position trading?Position trading is a long-term trading strategy. Here are its characteristics.Extended holding periods: Positions are maintained for months or years.Low trading frequency: In most cases, less than ten yearly trades are placed.Combination of fundamental and technical analysis: Position traders assess macroeconomic trends, industry dynamics, and company-specific factors to identify assets with strong growth potential. They also use technical indicators and chart patterns to determine optimal entry and exit points. To succeed, they need to use both fundamental and technical analysis tools.Identify trends: What are the major market trends, how likely are they to continue, and when will the trend peak?Patience and discipline: This strategy requires holding positions through short-term volatility and sticking to the determined strategy. When the trend peaks, put greed aside and take the gains. If the trend is just a fad, pull out and look elsewhere.Risk control: Implementing stop-loss orders and proper position sizing is crucial for managing long-term exposure.
Position Trading Strategies
Position trading involves several strategies. Here are a few.Breakout trading: Identify key support and resistance levels. Enter trades when the price breaks out of these levels, confirming the breakout with increased volume or other technical indicators.Commodities and indexes: Focus on specific asset classes such as commodities or indices. Monitor market announcements, economic indicators, and company-specific news to make informed trading decisions. These markets often provide stability and are suitable for long-term positions.Risk management: Set stop-loss orders to limit potential losses and take profit orders to secure gains once the target price is reached. Spread investments across different asset classes to reduce risk and increase the potential for long-term gains.
Position Trading Advantages and Risks
Like with every trading strategy, position trading involves advantages and risks. AdvantagesLess time-intensive once positions are established.Potential for substantial profits from long-term trends.Lower transaction costs due to fewer tradesRisksExposure to long-term market risks.Potential for significant losses if trends reverse.Opportunity costs from tying up capital for extended periods.Position trading can be more successful than day trading or ‘’invest and forget’’. The success rate depends on many factors relating to the investor and the economy’s overall health.
Position Trading Previous and Future Examples
Examples can always be a helpful tool to see how things work. Here are a few past and potential future examples to better understand position trading.
1. Tech Stock Boom (1990s-2000)
During the 1990s, the technology sector experienced unprecedented growth, driven primarily by the spread of the internet and personal computers. Two of the biggest gainers during this period were Cisco (up over 96,000%) and Intel (up nearly 6000%). Many other companies in the tech sector and the stock market saw huge increases in their stock prices. Position traders could hold their positions for nearly a decade until the trend peaked and the Dot Com Crash ruined all the fun.
2. Gold Bull Market (2000s)
The gold bull market began around 2001-2002 and lasted until 2011. Gold prices rose from about $255 to $1895 per ounce, representing a gain of over 640%. This happened for many reasons. First, gold became more attractive as a store of value due to policies that weakened the USD. Second, the financial crisis of 2007-2008 increased demand for gold as a safe-haven asset. Last, introducing unconventional monetary policies sparked inflation fears and boosted gold’s appeal. In 2011, the price of gold peaked and began to decline. Coincidentally, that marked the beginning of an incredible bull run in the US.
3. Crypto Stocks (2020-2021)
In 2020, Bitcoin and other popular cryptocurrencies began soaring and reaching new highs. Many Bitcoin and Ethereum miners emerged on the stock market (Bitfarms, Marathon Digital, RIOT Blockchain, and others). Many investors rushed to buy these stocks between the end of 2020 and 2021 without understanding their business model. This trend was much shorter than the tech boom and the gold rush. Once the price of Bitcoin crashed, the majority of traders exited their positions. During Bitcoin’s latest price surge, these companies’ prices haven’t followed suit because that trend is likely over.
4. Artificial Intelligence (2023-?)
In 2023, ChatGPT and NVIDIA exploded, and AI instantly became on everyone’s radar. Very quickly, AI spread to various sectors. Tech giants, startups, healthcare, transportation, and many more fields have begun developing and implementing AI in their daily business. Today, many believe AI is a bubble. If you think about it, the tech boom and the gold rush lasted ten years. AI has only been on everyone’s radar for two years. If you’re looking for today’s main trend, it has to be AI.
Position Trading vs Other Strategies
What if position trading is not for you? Some want to be more active traders, while others don’t want to consider it. Here are a few more trading strategies you can choose from. Keep in mind that you don’t have to stick to only one. If you can diversify your holdings, you can also diversify your strategy.
1. Day Trading
We begin with day trading. It is a trading strategy where traders buy and sell assets within a single trading day, aiming to profit from short-term price movements. Traders close all positions before the market closes, avoiding overnight risk. This approach requires constant market monitoring, quick decision-making, and disciplined risk management. Day traders often use technical analysis, chart patterns, and real-time news to make informed decisions. They typically focus on highly volatile liquid markets like stocks, forex, or futures. Day trading is risky and stressful; it demands significant time commitment, market knowledge, and emotional control. Day traders must have a solid strategy and strict risk management rules.
2. Swing Trading
Next on the list is swing trading. It aims to capture short to medium-term price movements. Swing traders hold positions for several days to weeks, seeking to profit from swings in asset prices. This approach balances the potential for larger gains than day trading with less time commitment than long-term investing. Swing traders use technical analysis, chart patterns, and indicators to identify entry and exit points. They focus on liquid markets and employ risk management techniques like stop-loss orders. Swing trading also requires discipline, market knowledge, and the ability to manage emotions. It suits traders who can’t monitor markets full-time but want more active involvement than passive investing.
3. Algorithmic Trading
Algorithmic (algo) trading uses computer programs to execute trades based on predefined rules and mathematical models. These algorithms analyze market data, often in real-time, to make trading decisions faster and more efficiently than human traders. Strategies range from simple automated order execution to complex high-frequency trading (HFT). Algo trading can capitalize on small price discrepancies, implement trend-following strategies, or execute large orders. It offers benefits like reduced human error, faster execution, and the ability to backtest strategies. However, algo trading requires significant technological infrastructure and expertise. Institutional investors mostly use it, but it is increasingly accessible to retail traders through various platforms and tools.
4. Buy and Forget Investing
We conclude this section with buy-and-forget investing (buy and hold). It is a long-term investment strategy where investors purchase assets to hold them for extended periods (years or decades). This approach is based on the belief that quality investments will appreciate over time despite short-term market fluctuations. Investors typically focus on fundamentally strong companies or diversified index funds. Buy-and-forget investing requires patience and discipline to resist reacting to short-term market volatility and impulses. Its benefits are lower transaction costs, potential tax advantages, and reduced time commitment. It is a successful concept and easy to implement, but it still requires careful initial research and periodic portfolio review to ensure alignment with long-term financial goals.
Final Thoughts: Position Trading
To conclude, position trading is a strategy where investors buy stocks or other financial assets based on trends. They keep them for months or years until the trend peaks, and they sell their assets. Historically, this has been a fruitful strategy during the tech stock boom in the 1990s and the gold rush in the 2000s. Both trends lasted around a decade. Today, AI is the most popular trend. Like the rise of the internet, nobody knows this technology’s true capabilities yet. This trend might last a few more years or decades. Who knows?If you want to learn more about profiting from the stock market, head to our free library of educational courses. We have something for everyone, including trading options for those with small accounts.
Frequently Asked Questions
Is Position Trading Profitable?
Position trading can be profitable if a trend's entry and exit points are timed perfectly.
What Are the Benefits of Position Trading?
Position trading takes less time, has the potential for substantial profits from long-term trends, and incurs fewer transaction fees.
What Is the Difference Between Trading and Investing?
Investors hold their positions for long, but traders can make long and short bets.
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