What is Position Trading? What are its Types, Advantages and Risks?
9 November 2022
Position trading is a strategy in which traders adopt long-term trading positions which may extend for several weeks or days. It is an advanced form of intraday trading in which individuals do not close their trade on the same day but extend it by a few days or months as per their requirements.
Under positional trading, investors do not look at short-term price fluctuations of stocks and rather focus on long-term gains that these stocks may offer. This form of trading comes with its own share of risks, but the risk level could be lower than intraday trading.
Continue reading to know more about the meaning of position trading, different strategies to adopt in position trading, its advantages and limitations.
What Is Position Trading?
Traders undertaking positional trade hold on to their assets for more than one day. The holding period may vary from an overnight session to several weeks or even months. These individuals expect the price of the underlying asset to increase as time passes and, thereby, get an opportunity to earn substantial returns.
Positional traders buy stocks of a company based on intensive research, whose prices may increase soon due to favourable market conditions. After these stocks reach their peak levels, they sell them to earn profits. Individuals identify these trends using candlestick charts, tables, bar graphs and by assessing the policy decisions taken by the government. It gives them an idea about any impending boom in stock prices.
For example, any announcement in the Union Budget about concessions given to the electric vehicle sector may increase their stock prices in the near future. In such cases, positional traders may buy shares of electric vehicle companies with the expectation of an increase in their prices over the coming weeks or months.
How Does Position Trading Work?
Position trading involves a planned entry and exit strategy with a stop loss target. The positional traders make an entry into this type of trading after rigorous fundamental analysis or getting notified of a favourable policy change.
After due consideration, they set an exit strategy, i.e. they will exit the trade and sell their asset when its price reaches a particular level. In case the asset price does not appreciate and further deteriorates, they will execute their stop loss target and exit the trade.
A stock price may see significant movement in its value when there is a change in the company’s or overall industry’s fundamentals. Let’s understand how positional traders adopt long-term trading strategies based on the market conditions and earn profits.
For example, the stock price of SAIL, India’s largest steel-producing company, saw a significant increase after the lockdown was lifted.
As the supply of steel did not improve for several months due to the global supply chain crisis and domestic supply was not able to meet the pent-up demand, it led to shortage of steel in the market. This increased retail prices of steel and allowed companies to widen their margins. All these factors improved the fundamentals of the steel industry after a prolonged period of slackness, and as a result, the stock price of SAIL saw an appreciation.
Hypothetically, a positional trader sensing an opportunity to earn profits would have bought shares of SAIL just as lockdown was lifted with the expectation that it would see a bull run in the coming weeks or months. Thus, he/she would have had an opportunity to earn substantial returns after the period of slackness got over.
So now that you are aware of what position trading means, let’s move onto the different strategies that one must adopt so as to increase their chances of profits.
What Are the Different Position Trading Strategies?
Position traders adopt or go ahead with different strategies according to their skill sets. Here are some strategies that one may choose to fulfil his/her objectives:
This strategy entails using technical tools to analyse the long-term trend of an asset. Under this strategy, traders use candlestick charts, tables, bar graphs and other visual representations to predict the asset’s long term price behaviour.
Individuals consider the current and past trading price of a stock, its trading volume, and relative strength index to arrive at a conclusion. Traders who use this strategy tend to only consider price-related fundamentals and avoid any other fundamental factor while arriving at a decision.
Another strategy adopted by positional traders is considering the fundamental factors while making any trading decision. It involves considering the qualitative factors and giving more emphasis to structural or fundamental changes occurring in the business environment of a particular stock.
Traders tend to be more assured and confident while adopting a fundamental trading strategy as it is a more practical approach. Under this strategy, traders look out for any policy changes announced by the government as well as any global trend associated with the assets.
Techno Fundamental Strategy
A combination of both technical and fundamental strategy is techno fundamental strategy. Traders using this strategy consider tables and charts to analyse price behaviour and use fundamental analysis to check qualitative changes of a stock. Traders may go ahead with their trade if the price signal is in sync with the fundamental analysis.
The positional traders use stop loss and exit strategy so as to mitigate chances of capital erosion. That said, traders generally keep a long stop loss target so as to incorporate any minor changes or swings in the price of stocks.
What Instruments Are Available for Position Trading?
Here are some instruments for which you can undertake position trading:
Shares are the most common form of an asset used in position trading. These are more stable than other instruments like foreign exchange and cryptocurrencies. Traders undertake a fundamental analysis of a company, and based on that, they get an idea about the worth of the company and where it may be headed in the near future.
You can also undertake position trading in commodities like gold, silver, crude, etc. These instruments come with a long-term trend and may prove to be highly beneficial if traded properly.
Commodities are not completely immune from volatility; they may witness serious fluctuations in their prices, but commodities have a tendency to stabilise faster than other instruments. Hard commodities like iron and gold are extracted by mining companies, and they maintain relatively stable trends. Usually, you may witness demand shocks in case of commodities with supply remaining fairly stable.
Certain benchmark indices are also available for position trading. For example, you can trade in Sensex and Nifty 50, two of India’s most popular benchmark indices. Indices are a group of companies from different sectors and industries, each having a different weightage in that particular index.
A benchmark index of a country will provide clear indicators about the overall functioning of that economy. Therefore, trends given by certain indices are more precise and stable and remain unaffected by short term fluctuation in one sector. Many experts consider indices as an ideal instrument for positional trading.
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Currencies of foreign countries are also available for positional trading. However, these could be more volatile than other market instruments. Generally, the price trend of any foreign currency is guided by the political environment of that country. A stable and less turbulent political environment of a country may provide clearer trends about future direction of the currency.
What Are the Advantages of Position Trading?
Some advantages of position trading are as follows:
Position trading can be beneficial for traders who wish to focus on long-term trends. An asset may see an appreciation in its value over the long-term and give significant returns to the trader.
You do not have to monitor the markets every day in case of positional trading. This may be ideal for people who cannot devote their full time to stock markets.
In positional trading, the number of transactions is quite less than in intraday trading. Hence, you do not incur charges like securities transaction tax, brokerage fees, or commissions on a regular basis. This could increase the net profit on your transactions.
You can see position trading as a hybrid strategy in which you will receive the peace and stability of long-term investment and enjoy high returns of trading.
What Are the Disadvantages of Positional Trading?
On the other hand, here are a few disadvantages of positional trading:
One of the biggest disadvantages of positional trading is that your capital gets locked for the trading timeline, which may last for several weeks to months. Therefore, you should have sufficient funds outside so as to meet any financial exigencies.
A sudden price reversal against the trend may lead to severe losses for the traders.
Many brokerages charge a swap fee which is the cost that they levy for keeping positions open. They levy this fee for as long as the position remains open, which may cumulatively become huge if a trader opts to hold his/her position for several months.
Although positional trading is less risky than day or swing trading, it still carries some amount of risk. The risk will keep on increasing till the position gets closed.
Limitations of Positional Trading
Traders need to time the market in order to be successful in positional trading. They must maintain their patience and take positions at the correct time. Any failure to time the market may lead to significant losses. Moreover, they must exit the trade at the most appropriate time because any delay in exit may wipe out all gains.
Risks of Positional Trading
The biggest risk associated with this type of trading is a sudden change or reversal in asset prices. If traders do not gauge this trend reversal early on and take appropriate actions, it may lead to a massive financial loss.
Position trading has become an increasingly popular tool among traders because of the hybrid characteristics it entails. It provides the peace and stability of long-term investment as well as the high return potential of trading. This detailed guide about the meaning of positional trading will help readers understand this concept better and make more insightful decisions.
Q1. What is the difference between swing and positional trading?
Ans. The basic difference between swing and positional trading is the holding period. Positional traders keep their positions open for a longer period than swing traders. A position in swing trading is open for a few days or weeks. However, in the case of positional trading, positions may remain open for several months as well.
Q2. What are factors that influence risk and reward of positional trading?
Ans. A sudden reversal in the price of trading assets may influence rewards that one can potentially earn from position trading. Lower liquidity in the hands of traders due to prolonged capital investment timelines may also influence gains from this trading strategy.
Q3. What is the taxation on income earned from positional trading?
Ans. As you receive physical delivery of shares in position trading, the income earned from this type of trading comes under income from capital gains in ITR. If the holding period of stocks is less than one year or 365 days, proceeds are taxable under short term capital gains tax. The rate of STCG is 15%. On the other hand, if you hold these stocks for more than 12 months, gains exceeding Rs.1 lakh come under long term capital gains tax. The rate of LTCG is 10% without indexation benefit.
Q4. Is Demat account necessary for positional trading?
Ans. As positional trading requires you to hold the shares for more than one trading session, you will receive physical delivery of shares. Hence, in order to receive physical delivery of shares, a Demat account is necessary. Therefore, if you opt for positional trading, you must open a Demat account with a registered stock broker.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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