Embracing a long-term trading strategy can be a lucrative approach for traders looking to capitalize on significant market trends. Enter position trading, which acts like a wise old tree in a forest of saplings, taking its time to grow and reach for the sky.
In this guide, we'll review the nuances of position trading, including what it is, how it works, its advantages, and disadvantages. We’ll also discuss the differences between position trading and swing trading.
What is positional trading?
Positional trading is an investment strategy where traders hold a position in a financial instrument for a long period of time, typically months or years. This approach is based on the expectation that the long-term price movements of the instrument will be profitable despite short-term market fluctuations.
In cryptocurrency, this practice is called HODLing.
What is open position trading?
Open position trading is when traders have initiated a trade by buying or selling a financial instrument and have not yet closed that position with a corresponding sell or buy.
This technique makes it easy to succumb to short-term results, whether advantageous or bleak. If an asset increases a bit in price, traders’ instinct may be to sell immediately and cash in on the small gains. Otherwise, if the price decreases, they may feel inclined to sell so they don’t lose further.
What are positions in stocks?
Positions in stocks refer to the holdings or investments that an individual or entity has in a particular stock or set of stocks. When someone says they have a "position" in a stock, it means they own shares of that stock. Positions can be either long or short.
How does position trading work?
Position trading is about setting dates in mind but also depends largely on traders’ intuitions about an asset’s performance. To understand how it works, let’s take a look at an example.
A position trader conducts a thorough analysis of Bitcoin's (BTC) potential over the next few years and includes factors like:
- Technological developments: They evaluate advancements in blockchain technology, Bitcoin's scaling solutions (like the Lightning Network), and overall improvements in the crypto ecosystem.
- Adoption trends: This helps assess the adoption rate of Bitcoin as a digital asset, both by retail traders and institutions. This might include looking at regulatory developments, integration into payment systems, and growing acceptance as a store of value or a medium of exchange.
- Market sentiment and competitors: Here, they analyze the overall sentiment in the crypto market and Bitcoin’s position relative to other cryptocurrencies, like Ethereum or emerging altcoins.
Suppose the trader concludes that Bitcoin has strong long-term growth potential based on these factors. They might then decide to buy and HODL Bitcoin, expecting its value to increase significantly over the next few years. This decision would be grounded in the belief that, despite short-term volatility and price dips, Bitcoin's value will trend upward in the long term due to its technological advantages, increasing adoption, and dominant market position.
During the holding period, the trader would likely experience significant ups and downs in Bitcoin’s price. However, as a position trader, they would avoid making impulsive decisions based on these short-term movements. Instead, they would maintain their position until their long-term analysis suggests it's time to sell, which could be several months or even years later.
What do position traders do?
Position traders exhibit a patient and methodical approach, aligning more closely with traditional buy-and-hold investment strategies. They conduct thorough research to identify and follow market trends, prioritizing sustained growth over immediate gains. Here are a few key responsibilities:
Long-term investment horizon
Position traders hold their investments for long periods, ranging from months to years, looking beyond the daily market noise to focus on longer-term trends.
Indifference to short-term fluctuations
They’re less concerned with short-term volatility or price swings, which can occur for any investment. This attitude goes double in cryptocurrency, where assets are particularly vulnerable to market trends and can endure price jumps or dips relatively quickly.
Trend following
Position traders likely believe that once a trend starts, it won’t end right away. They aim to give the trend enough time to take full form, allowing the asset to expand its value and produce greater rewards.
Selective trading activity
Position traders aren’t active daily. Their trading frequency is much lower than day traders or swing traders. They make calculated and infrequent trades based on extensive research and analysis.
Which strategies do position traders use?
Position trading strategies cover various approaches traders use to capitalize on anticipated long-term market trends. Unlike short-term trading tactics, these strategies require a comprehensive understanding of the market dynamics, patience, and a keen eye for identifying potential long-term shifts in market behavior. The core idea is to enter positions that will benefit from large-scale market movements over an extended period.
Here are a few key position trading strategies:
Fundamental analysis
Fundamental analysis involves looking deeply at a company to decide if it’s worth investing in. Here, traders examine the company’s financials, growth plans, or initial public offering (IPO) plans.
Position traders using fundamental analysis might invest in undervalued companies with strong fundamentals, expecting to realize the true value in the long term.
Technical analysis
This involves looking at chart patterns of assets like stocks or cryptocurrencies. Examining these patterns helps traders decide if an asset’s price will travel north or south. They also provide a better idea about the asset’s trading volume.
Sector rotation
Sector rotation involves identifying and investing in sectors expected to perform well in the coming months or years based on economic cycles.
For example, a trader might invest in technology stocks during a market recovery phase, anticipating higher growth in this sector.
Long-term position trading
This is the most pursued strategy. As traders want to garner the highest gains possible, they primarily avoid touching assets and letting as much time pass as necessary to ensure prices reach the peak, earning greater rewards.
Pros and cons of position trading
Position trading offers a unique set of advantages and challenges. By aligning with broader market movements and minimizing the impact of short-term volatility, position trading can provide significant opportunities for traders. However, it also comes with specific risks and demands a particular mindset and skill set.
Here are the pros and cons of position trading:
Pros
- Less trading fees: Position trading often leads to fewer active trades, as traders are more eager to step away and give assets time to grow. So reduced activity means less trading fees.
- Higher profit-earning potential: By capturing large market movements over months or years, position traders can achieve substantial profits.
- More time for analysis: The long-term nature of position trading gives more time to thoroughly research and analyze potential investments.
Cons
- Locks capital: Position traders lock their money for a set period, which they can’t use for other investment opportunities.
- Offers limited opportunities: Identifying and capitalizing on long-term trends can be more challenging, and there may be fewer trading opportunities than short-term strategies.
- Requires excessive patience: It can be nerve-wracking to wait months or years for an asset’s value to grow. Those who lack patience, prefer short-term gains, or seek to engage in more active trading may find it difficult to allow excessive time for an asset’s true value to hatch.
Position trading versus swing trading
Position and swing trading are two distinct strategies catering to different investment styles and timeframes. Each has its unique approach, risk profile, and set of techniques. Here are the key differences between the two:
Time frame
Position trading involves holding trades for several months to years, while swing trading means holding positions for a few days to several weeks, with traders looking to profit from short- to medium-term market trends.
Frequency of trades
Position traders might only execute a handful of trades over a year, as their strategy is based on capturing large, long-term market moves. Swing traders, however, execute more trades as they capitalize on short-term market movements and trends.
Market analysis
Position trading heavily relies on fundamental and technical analyses to identify potential long-term trends and entry and exit points, but the core decision-making is often based on a deep understanding of market fundamentals.
Swing trading, conversely, primarily uses technical analysis to identify potential short-term price movements and market trends. Swing traders often use technical indicators and chart patterns to make trading decisions.
Trading goals and psychology
Position trading requires a lot of patience and a high tolerance for market fluctuations. Swing trading, on the other hand, needs the ability to make quick decisions and adapt to changing market conditions.
Risk and capital management
Position trading involves potentially greater exposure to market risk due to the extended period of holding the trade. However, position traders typically use strict risk management techniques, such as stop-loss orders, to mitigate these risks.
In swing trading, however, the shorter holding period reduces exposure to long-term market risk, but it often involves more frequent trading, which can lead to higher transaction costs and requires effective trade management to ensure profitability.
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