Position Trading: Much More Than Just Buy-Hold-Sell
Jul 19, 2017 | 17:31 PM IST
Jul 19, 2017 | 17:31 PM IST
Wait and watch. One of the most common phrases used in the English language. But if used in the right context, it can be a very powerful expression. In the context of trading, position trading can be best explained by using these three words wait and watch. Truly, in position trade, the traders just have to wait and patiently watch the movement of their trades. Is that all the position trading has to offer? Not really, like every other thing in the stock market, position trading has its own set of complications and challenges. It's not as risky as intraday trading or margin trading but it's vulnerable to short-term woes. So let's explore the hues and shades of position trading. Let's try to find out whether it's a design made for you or you should stay clear of it.
What Is Position Trading?
Position trading is a form of short-term trading where a trader enters a certain stock and holds the position till he believes the stock has reached a point of a trend reversal (A point where the stock starts its downtrend). The time frame of position trade is indefinite. Unlike intraday and Buy Today Sell Tomorrow (BTST), the time frame in position trade can be from few minutes to few years. However, it can't be called a long-term investment simply because the trader is buying the stock with a certain target in the mind. The timeframe sometimes may be long but it's just a waiting period. Position trading is more of an attempt to capture and exploit full benefits of the upward trend of the stock. Hence, it is also called 'Trend Trading'. Position trading is based on the assumption that the current trend will carry on for some time in the future.
Types Of Position Trades
Position trading is not as complex as intraday trading. It's simply a buy-hold-sell affair. But if we put it under the lens of micro analysis, we get to see two distinct approaches to position trading. It is important to note here that unlike intraday, in position trade the emphasis is not on the minor movements, in order to gain from position trading it's critical that the stock moves considerably. Hence, for the traders, it becomes important to identify the trends of the stocks and ascertain the entry and exit points.
1. A Trend Finder - In this approach, traders do intensive research and technical analysis of the potential stock to identify the trend and the pattern forming on the chart. In this stage, the stock has not started its upward trend but is at the breakout point. Here a trader, through his/her knowledge and skills, can predict the start of a trend and enter the stock.
2. Join The Trend - In this type, traders don't take the trouble of identifying or predicting the start of the trend. Instead, they take an easier route of just finding a stock which has already started its upward trend and enter it. Though it might sound easy, however, identifying a trend and then determining its time frame requires high skills and competence.
Is Position Trading A Golden Middle Of Trading & Investing?
Position trading is a unique trading style. It gets good of both intraday trading and long-term investing. So would it be fair to call it a golden middle of trading and investment? Well, on the face of it seems like that, but if you look closer you see the cracks appearing. Though position trading is kinder than intraday, it is still essentially a type of a trading. Hence, it is important that traders have a thorough understanding of the trends, trading patterns and most importantly, technical analysis. Also, it is important for a trader to have exit judgement to close a good position trade.
The core value of investing is to get maximum value on the invested capital irrespective of trends, time, pattern, etc. So even if the position trade goes for few years, it still remains 'trading'. Hence, it cant be called investment.
Pros And Cons Of Position Trading
Risk Management - Though every type of trading carries a certain risk, the degree of risk varies. Position trading is less risky than day trading. In position trading, you get ample opportunities to correct your mistakes. In a way, there is a lot of scope for risk management in most of the cases of position trading.
Hassle-Free Trading - As sometimes the trader holds the position for a long period of time and the trader is aiming to exploit full benefit of the upward momentum, he/she need not worry about the momentary hiccups that every stock goes through from time to time, which makes it relatively hassle-free compared to intraday trading and swing trading.
Stocks never move upward or downward in a straight line. In position trading, once you have identified the stock, in its journey to the top, the stock consolidates, forms higher lows and lower lows several times. This is the point which separates swing traders from position traders. A swing trader will cash in every high while a position trader disregards highs and lows till the point he/she believes the trend is about to reverse. So as there is no pressure to capitalise every high-point, the proceedings become calm and hassle-free.
Misjudging The Trend Reversal - As we discussed above, the stock doesn't move in a straight line and forms many higher highs and lower lows on its way up. In position trading, there is a great possibility that the trader might misjudge the trend reversal and miss out on profit booking opportunities.
Imagine if you have entered a stock and have set a certain target. The stock will start its uptrend and after going up for some time it starts correcting. In the worst case scenario, if it turns out to be a trend reversal, there is a great risk of the stock causing heavy loss of time and money for the trader. There are means like stop-loss or trailing stop-loss to minimise the damage in such scenarios.
Miss Out On Compounding - Unlike intraday trading or swing trading where the traders buy and sell stocks more frequently, in position trading the capital is locked in for quite a long period. Hence, the traders miss out on the opportunities to book profits and roll it over to other promising stocks. For example, if a trader buys 100 stocks at Rs. 100 and in 15 days it reaches Rs. 105, the swing trader will book the profit of Rs. 500 and invest the capital plus profit in a new stock, whereas position trader will hold the stock as the position trading strategy is to hold it till the trend reversal is around the corner.
As we discussed above, position trading comes across as the easiest form of trading, but is it really as easy as it seems? The answer is NO. Here are the things a position trader has to do - 1. Find the right stock 2. Identify the trend through rigorous analysis 3. Ascertain the entry point and set the exit point 5. Keep regular track of how the stock is moving and is trend reversal happening. Too much work, isnt it? Its a job of professional traders.
So if you are a working professional and cant devote your time to research and analysis it better to invest your hard earned money in long-term stocks with the help of professional stock advisors.