Understanding Position Trading
Position trading is an offshoot of trend trading, which sees traders following trends through their culmination. Position traders sit somewhere between swing traders and buy-and-hold traders, holding their investments for weeks and months, as opposed to trading every few days or holding for years. They don’t necessarily trade specific sectors or securities—rather, they focus primarily on entering and exiting trends at peak times.
Position trading is common with investors and day traders alike. It often requires very little effort once you have a mastery of pattern recognition and trend analysis. Most position traders open a position, set appropriate targets and stop-losses, and wait out the culmination of a pattern. For this reason, it’s considered a form of passive trading.
Position Traders Follow Trends
The most important thing to a position trader isn’t the security or the price—it’s the trend. Moreover, position traders aren’t concerned with short-term trends. They’re interested in strong trends that occur over weeks and months. Position traders understand that short-term price fluctuations are based in trading volatility. Longer-term trends, however, represent the security more accurately.
To be an effective position trader, expect to rely on both fundamental and technical analysis. Successful position traders understand the context between the trend they’re playing and the behavior of the security within the scope of that trend. To do this requires proficiency in pattern recognition and a penchant for contextualizing the movements of a security.
To understand how position traders operate, it’s best to illustrate how they stack up against other investment philosophies.
Position Trading vs. Buy-And-Hold
Buy and hold investors typically hold securities for years and years. They’re not concerned about trends. Instead, they’ve done due diligence on a security and feel strongly about the long-term implications of that security. They’ll hold through price fluctuations, patterns and volatility, and will typically only exit a position in the event of a major setback that affects their core investment thesis.
Position traders may hold securities for long periods, but they’re targeting an eventual exit from the position. Their intent isn’t to keep a stock as it appreciates at the pace of the market. Instead, they’re seeking to play out the culmination of a long-term trend before the stock faces a correction.
Position Trading vs. Swing Trading
Swing traders enter and exit positions over a period of days. They’re capitalizing on short-term volatility trends. Typically, swing traders get onto a pattern and trade that pattern at the breakout, riding it to a price target where they’ll exit. Swing trades need to close quickly to avoid short-term volatility. This is why they take days instead of weeks.
While they have the same fundamental approach, position trading and swing trading differ based on timeline. Position traders avoid volatility by capitalizing on longer trends that inherently offer better stability. Swing traders also have the luxury of entering a position further into the pattern without sacrificing gains.
Position Trading vs. Day Trading
Day trading happens at an even faster rate than swing trading. This puts it further away from the stability demanded by position traders. While many patterns do manifest in intraday trading, the instability of ever-changing price fluctuations makes it difficult to have confidence in certain patterns. Position traders avoid intraday trading for the same reason they avoid swing trading: the timeline is too short.
Position trading also benefits from not needing minimum equity requirements. Day traders are subject to the pattern day trading rule, which restricts day trades to four round-trip trades in five trading days. Position traders open and close positions over weeks and months, which absolves them of minimum equity requirements.
Pros and Cons of Position Trading
There’s a lot to love about position trading and a few things to be wary of if you’re thinking of adopting this strategy. Here’s a look at the pros and cons of position trading:
The pros of position trading largely revolve around the stability and prominence of trends over a longer time horizon.
- Longer time horizon means more opportunities to enter a position
- Longer time horizon means less stress in monitoring positions
- Patterns become more reliable and pronounced over a longer time horizon
- Less volatility in trends when observed over weeks and months
- Limited investment maintenance (resetting stop-losses)
- No minimum equity requirements for traders
The cons of position trading have to do with the length of time spent invested in a security and the tendency of patterns to correct in time. For example, this includes:
- Lower liquidity when invested in positions for weeks, months or years
- Trend reversal can result in major losses on naked positions
- Position traders typically exit too early to benefit from compounding dividends
- Larger capital base required to place and reposition stop-losses
- Requires strong technical and fundamental analytical skills
- Fewer number of trades over a given time horizon, resulting in less hedging
The Bottom Line on Position Trading
Position trading is a true intermediary between day trading and long-term investing. It offers the best of both worlds: mitigating volatility and maximizing return on investment for technical investments. Traders who learn to qualify and capitalize on long-term trends will find themselves safeguarded against the up-and-down fluctuations of shorter time horizons. Moreover, these trends can yield big gains—whether you have a short or long position.
Many pattern traders shift into position trading as a low-stress way to capitalize on their technical and fundamental analytical abilities. Given a long time horizon and a consistent pattern, these individuals have the potential to see great gains for their patience.