Positional Trading Strategies: Meaning, Advantages & Disadvantages

Last Updated: 13 Jan 2025

If you want to trade in stocks but can’t keep up with the daily fluctuations, and don’t want to engage in long-term investments, then positional trading could be ideal for you. Let’s understand positional trading strategies and how they may benefit your financial goals.

What is a positional trading strategy?

This is a common trading strategy that allows traders to hold and maintain their position in the stock market for longer than the intraday timing. This period can be a day, a week, or even a month. As a result, the profit potential is greater, but so is the risk.

Position trading can be considered the premium version of day trading. The position trader wants to correct the long-term trend and make a profit without waiting for short-term price movements. Position trading is similar to investing, but the key difference here is that an investor who buys and holds is limited to only going long.

For example, a well-known position trader, Philip A. Fisher was not only a great investor, but he was also followed by many fans, including Warren Buffett, and has made big investments by focusing on good companies that provide encouraging data. In 1955 Fischer made a long-term investment in Motorola stock, a position he held until his death at the age of 96.

Positional trading has grown in prominence over the years because it avoids one of the most significant dangers of intraday trading: needing to level out a transaction before the end of a trading session. Positional trading allows one to sustain positions for one or more days, weeks, or months, depending on your objectives. Positional trading does not have a specific period; instead, it can be chosen depending on the nature of the deal.

How Positional Trading Strategies Work? (80-90 (Use keywords 2 times))

Here are the key aspects of positional trading strategies:

1. Fundamental Analysis: Evaluate a company’s financial health and growth potential.
2. Technical Analysis: Use charts and indicators to identify entry and exit points.
3. Support and Resistance Levels: Identify key price levels to guide decisions.
4. Trend Following: Buy in rising markets, sell in falling ones.
5. Breakout Trading: Capitalize on significant price level breaches.
6. Long-term Holding: Hold positions for weeks to years, aiming for substantial gains.

These strategies help minimize short-term noise and maximize long-term returns.

How do position traders use a Fibonacci retracement?

Positional traders use Fibonacci retracement to identify potential support and resistance levels, helping them make informed decisions. Here’s how they do it:

1. Identify Key Points: Traders select significant high and low points on a chart, usually a swing high and a swing low.
2. Apply Fibonacci Levels: Using the Fibonacci retracement tool, they divide the vertical distance between these points by key Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, and 78.6%).
3. Draw Horizontal Lines: These levels are marked as horizontal lines on the chart, indicating potential reversal points.
4. Analyze Price Movements: Traders look for price reactions at these levels to confirm support or resistance.
5. Make Trading Decisions: Based on the analysis, traders decide on entry and exit points, aiming for low-risk, high-reward trades.

By using Fibonacci retracement, positional traders can better predict price movements and improve their trading strategies.

Risks involved

The most common risks in Position Trading include low liquidity and the risk of trend reversals. Whenever there is an unexpected reversal in an asset’s price trend, it incurs significant losses for position traders. Position trading also requires investors to freeze their capital for a longer period. Therefore, it is advisable to evaluate your risk profile before entering the world of position trading.

When you employ a combination of fundamental and technical research to identify prospective market trends and dangers before starting a trade or investing, you are a successful position trader.

Positional trading strategies

While position trading may appear to be easy, it requires deep fundamental and technical research, as well as a solid grasp of the markets. Here are a few strategies to help you trade more effectively:

1. Support and Resistance Trading

   Support and resistance indicators can assist you in determining if the price of an asset is likely to fall into a downward trend, or grow into an upward trend. Depending on this evaluation, you may determine whether to start a long position and profit from weekly, monthly, or yearly rising prices or a short position and profit from price reductions that last for a long time.

   When trying to ascertain support and resistance levels, the following three major factors must be considered.

   • The most dependable source of support and resistance levels is historical pricing.
   • Previous levels of support and resistance serve as indicators of future trends.
   • Technical indicators that might provide dynamic support and resistance levels that fluctuate in response to the price of a certain asset.

2. Breakout Trading Strategy

   Breakout trading entails attempting to open trade during the early phases of a trend. Typically, a breakout strategy serves as the foundation for trading large-scale market swings.

   A breakout trader, like a support and resistance trader, will normally start a long position once the stock price breaks just above the resistance line, or a short position after the stock goes down below the support level. As a result, to be a great breakout trader, you must be familiar with spotting levels of support and resistance.

3. 50-Day Moving Average Trading

   The 50-Day Moving Average Indicator is among the most important indicators in positional trading. 50 is a factor to both 100 and 200, which are moving averages representing important long-term trends. Whenever the 50-Day Moving Average indication crosses with the 100 and 200-Day Moving Average indicators, it may signify the beginning of a new long-term trend, making it a useful indication for positional traders. The stop-loss in a trade executed using this approach is set immediately below the most recent swing down.

4. Pullback and retracement trading strategy

   A pullback is a small drop or retreat in an asset’s current rising trend. Pullback trading allows traders to profit on declines or delays in the upward trajectory of an asset’s price. The goal is to purchase undervalued stocks and sell them after the asset has recovered from the setback and resumes its upward trajectory.

   Pullbacks are frequently alluded to as retracements, although they are not the same as reversals. A technical indicator called Fibonacci retracement can help you evaluate whether a market decline is a pullback or a reversal.

Advantages of position trading strategies

• Positional trading is a long-term strategy that can yield significant gains.
• The positional trading strategy takes advantage of large stock moves spanning weeks and months.
• Because positions do not need to be examined daily, the trader is less concerned than with certain short-term techniques.
• The positional trading strategy simply necessitates time spent analyzing probable stocks, leaving greater time for other transactions or professional duties.

Disadvantages of position trading strategies

As the saying goes, while every activity has advantages, it also has its own set of disadvantages. Similarly, a position trading strategy has its own set of drawbacks that you should be aware of before engaging in trade:

• As transactions might run for several months, a large amount of cash is required to keep positions open for an extended length of time.
• Transfer expenses can quickly add up if the position is open for an extended length of time.
• The positional trading strategy also necessitates the investor’s capital being locked up for extended periods. It is thus advised that you get your risk profile assessed before venturing into the realm of positional trading.
• Deposits are required since trading positions with small amounts of money is impossible. As a result, large price changes are more likely to result in a total loss of invested cash.

To identify market movement, positional traders rely heavily on fundamental and technical research. Positional trading may be a good alternative to trading stocks if done properly with analysis and understanding. These strategies aren’t simple to implement, especially for novice investors, but if you’re just getting started with positional trading, these positional trading strategies help you feel more confident in your decisions. Positional trading can be a great alternative to day trading if you trade with accurate knowledge and research.

Frequently Asked Questions

What is the best strategy for positional trading?

The 50-Day EMA is regarded as the most effective positional trading strategy, determining the trend’s direction. Before proceeding, it is critical to have a clear awareness of the trends. When the positional trading strategy is applied, the odds of making a profit skyrocket.

What is a positional trading example?

Position trading is a trading method in which a trader holds trades for prolonged weeks, months, or even years while waiting for a significant price move. You don’t have to be a full-time trader to keep an eye on the daily fluctuations that happen in the stock market.

Is Positional or Intraday better?

If you have limited resources, intraday trading is a better option than positional trading since positional trading demands more capital. Another element to consider is how much risk you are willing to take as intraday trading is a high-risk endeavor.

Which time frame is the best for position trading?

The best time frame for applying the positional trading strategies is typically the daily or weekly charts. These time frames provide a clear view of long-term trends and reduce the noise of short-term market fluctuations, helping traders make informed decisions.

Which chart is best for positional trading?

For positional trading strategies, candlestick charts are often the most effective. They provide detailed information on price movements. It shows all the details like open, high, low, and close prices. This helps traders identify patterns and trends over longer periods.