What is a Positional Trading? What are the top position trading strategies?

Introduction

Positional trading is a medium-to-long-term investment strategy where traders hold a position in the stock market for weeks, months, or even years, with the expectation of making profits from significant price movements. Unlike intraday trading, which focuses on short-term fluctuations, positional trading is more about capturing the broader market trends. It allows investors to take a step back, reduce the noise of daily market volatility, and let their positions mature over time. In India, where market dynamics are influenced by various factors such as economic policies, global market trends, and corporate earnings, positional trading offers an opportunity to capitalize on larger market trends.

This article will explore positional trading, its benefits, and the top positional trading strategies that are popular in India.

Topic covered

• What is Positional Trading?
• Benefits of Positional Trading
• Key Risks of Positional Trading
• Top Positional Trading Strategies
• Conclusion

What is Positional Trading?

Positional trading is a long-term investment strategy where traders take a position in a financial asset and hold onto it over a significant period, often disregarding short-term market volatility. The goal is to capitalize on major market trends or shifts that may occur over weeks, months, or even years. This approach is commonly used in equity markets, but it can also be applied to commodities, currencies, and other financial instruments.

Characteristics of Positional Trading:

• Time Horizon: Positional traders typically hold positions for several weeks or months, sometimes longer. The main objective is to capitalize on long-term price trends.
• Fundamental Analysis: Since positional traders focus on longer-term trends, they heavily rely on fundamental analysis. They evaluate a company’s earnings reports, revenue growth, industry performance, and macroeconomic factors before entering a position.
• Lower Trade Frequency: Unlike day trading or swing trading, positional trading involves fewer trades. This allows traders to focus on more significant market moves rather than reacting to every minor price fluctuation.
• Patience: Positional traders must be willing to tolerate short-term market volatility and stay committed to their positions despite price fluctuations.

Benefits of Positional Trading

1 Reduced Stress: Since positional traders hold onto their positions for longer durations, they are less affected by daily market noise and short-term fluctuations. This can reduce the stress associated with constant market monitoring, making it a more relaxed approach compared to day trading.
2 Fewer Transaction Costs: With fewer trades, positional traders incur lower transaction costs such as brokerage fees, commissions, and taxes, compared to short-term traders who make multiple trades daily.
3 Potential for Significant Returns: By holding onto a position for a longer period, traders can take advantage of major market moves, often resulting in significant profits. For example, holding a stock through a bull market rally can lead to considerable gains.
4 Flexibility: Positional trading allows traders to maintain other commitments, such as full-time jobs or other investment activities, without the need to constantly monitor markets.

Key Risks of Positional Trading

Market Volatility: Even though positional traders are less focused on short-term price movements, significant market volatility can sometimes affect their positions, particularly during events like earnings reports or geopolitical crises.
Overexposure to Risk: Since positions are held for extended periods, there is a risk of being overly exposed to downturns or significant market corrections. This can result in substantial losses if traders fail to act in time.
Patience and Discipline: This strategy requires a great deal of patience and discipline. Traders need to stick to their strategy even when short-term movements go against them. Emotional decisions during a temporary price drop can lead to premature exits from a trade.
Missed Opportunities: While holding long-term positions, traders may miss out on short-term opportunities. For instance, while waiting for a stock to rise over a few months, a trader might miss out on quicker profits in another stock.

Top Positional Trading Strategies

Trend Following Strategy

Trend following is one of the most popular strategies for positional traders. The idea is to identify the general direction of the market or a particular stock and then take a position in line with the trend. This strategy assumes that markets tend to move in one direction for an extended period and traders can capitalize on these trends.

Steps to Execute a Trend Following Strategy:

• Identify the trend: Use technical analysis tools like moving averages (e.g., 50-day and 200-day MA) or trendlines to determine the overall direction of the asset.
• Enter the trade: Once the trend is established, take a position in the direction of the trend (long for an uptrend, short for a downtrend).
• Set stop-loss: To protect against significant losses, place a stop-loss order below a key support level.
• Monitor for trend reversals: Regularly check for signals of a trend reversal and exit the trade if the market shows signs of moving in the opposite direction.

Breakout Strategy

The breakout strategy is based on identifying key levels of support and resistance and then taking a position once the price breaks through these levels. When a stock price breaks out from a significant resistance level, it often continues to rise, making it an ideal entry point for positional traders.

Steps to Execute a Breakout Strategy:

Identify key resistance or support levels: Use chart patterns, such as ascending triangles, head and shoulders, or flags, to locate levels where price consistently fails to break through.

Enter the trade: Place a trade when the price breaks above resistance (for a long position) or below support (for a short position).
Set stop-loss: A stop-loss order should be placed just below the breakout point for long positions or just above it for short positions.
Watch for continuation: Breakouts often signal the beginning of strong trends. Keep an eye on volume to confirm the breakout, as higher volume typically accompanies significant price movements.

Fundamental Analysis Strategy

In this strategy, traders focus on the underlying fundamentals of a company or an asset before taking a position. This involves analyzing financial statements, earnings reports, revenue growth, debt levels, and macroeconomic indicators that can influence the price over the long term.

Steps to Execute a Fundamental Analysis Strategy:

• Research the company: Examine the company’s financial health by analyzing its income statement, balance sheet, and cash flow statement. Strong revenue growth, low debt, and high profitability are positive indicators.
• Evaluate the industry: Look at the overall industry performance and future prospects. Companies in growing industries with a competitive advantage are more likely to see long-term gains.
• Monitor economic indicators: Keep an eye on broader economic trends such as interest rates, inflation, and GDP growth, which can impact a company’s performance.
• Enter the trade: Once confident in the company’s long-term potential, take a position and hold it for the long term.
• Re-evaluate periodically: Continue to monitor the company’s financials and adjust your position if the fundamentals change.

Pullback Strategy

In a pullback strategy, traders wait for the price of an asset to pull back to a support level during an uptrend before entering a long position. This strategy is based on the idea that prices often retrace to certain levels before continuing their upward trajectory.

Steps to Execute a Pullback Strategy:

• Identify an uptrend: Look for an asset that is in a strong uptrend using moving averages or trendlines.
• Wait for a pullback: Wait for the price to decline to a key support level, such as the 50-day moving average or a previous resistance level that has now turned into support.
• Enter the trade: Once the price bounces off the support level, take a long position.
• Set stop-loss: Place a stop-loss order just below the support level to minimize risk.

Contrarian Strategy

The contrarian strategy involves taking a position opposite to the prevailing market sentiment. This strategy is based on the belief that markets often overreact to news, resulting in exaggerated price movements that can eventually correct. Contrarian traders look for opportunities to buy undervalued stocks or short overvalued ones.

Steps to Execute a Contrarian Strategy:

• Identify overreactions: Look for stocks that have experienced sharp declines or rallies due to news or market sentiment but have solid underlying fundamentals.
• Enter the trade: Take a position contrary to the prevailing sentiment. For example, buy a stock that has dropped significantly but has strong fundamentals.
• Wait for correction: Be patient and wait for the market to correct itself, leading to potential profits as the price returns to its intrinsic value.

Conclusion

Positional trading is an effective strategy for traders who prefer a long-term, less stressful approach to the financial markets. Positional traders can capture significant market moves by focusing on market fundamentals and trends while avoiding the noise of daily price fluctuations. Whether you choose a trend-following strategy, breakout strategy, or fundamental analysis, staying disciplined and patient is essential. With the right approach, positional trading can be a highly rewarding strategy for long-term success.