Position trading focuses on holding assets for months or years to profit from long-term trends, ignoring short-term fluctuations. Here’s a practical guide to understanding key strategies and how this approach can benefit value investors.
The Context
Have you ever come across a stock that doesn’t look great at first, but after digging deeper, appears to be relatively acceptable if not an excellent one? These stocks may not be valuable enough to include in your core portfolio, but they still hold the potential for short-term gains.
Most disciplined deep-value investors often discover these overlooked opportunities in their periodic analysis. After spending hours of study, some of these stocks are still worth considering for a shorter-term play. That’s where position trading comes in handy.
While value investors typically avoid any form of trading, position trading offers a hybrid approach that can help generate additional returns for your portfolio.
Position trading is a strategy that involves holding assets for extended periods to capitalize on long-term market trends. Unlike day trading or swing trading, which focuses on short-term fluctuations, position trading is more concerned with the bigger picture. It combines fundamental analysis, similar to value investing, with a touch of technical analysis to understand economic trends and guide your investment decisions.
In position trading, trades can be held for anywhere from several months to several years, depending on the trend and your analysis. The goal is to capture long-term price movements, so positions are typically held through short-term market fluctuations, with a focus on sustained trends rather than quick profits
Let’s look at some of the best position trading strategies that are worth considering and require minimal effort to implement, especially when your fundamental analysis is solid.
Trend Following Strategy
This strategy involves identifying and following long-term market trends. Here you can hold positions as long as the asset price moves in the desired direction, using technical indicators like moving averages to confirm trends and exit when they reverse.
The strategy is quite simple to follow and the most popular trend-following strategy is the Moving Average Crossover method, which involves using two moving averages (MA) – a short-term moving average (e.g., 50-day MA) and a long-term moving average (e.g., 200-day MA). The strategy signals a buy when the short-term moving average crosses above the long-term moving average, often referred to as the “Golden Cross,” indicating the start of an upward trend. Conversely, a sell signal occurs when the short-term moving average crosses below the long-term moving average, known as the “Death Cross,” suggesting a downtrend.
Again, you may typically hold your positions as long as the trend remains intact, exiting once the crossover suggests a reversal. This strategy works by focusing on long-term trends, reducing the impact of short-term market fluctuations, and helping you capture significant price movements without the need for constant monitoring. It is most effective in markets with clear, sustained trends and can be applied to various asset classes beyond stocks.
Breakout Trading Strategy
This position trading strategy is executed by watching for key support and resistance levels. When the price breaks through a significant level, it signals a new trend. You can enter trades during these breakouts and hold until the trend weakens or reverses.
This strategy is also quite a no-brainer where you start by identifying a key resistance level where a stock or asset has consistently faced selling pressure, such as a price point it has struggled to surpass, like Rs. 100. Once the asset approaches this level again, you wait for a breakout—when the price moves above the resistance with increased volume, signaling strong buying interest. After the breakout, you enter a buy position, expecting the price to continue rising.
To manage risk, it’s always safe to set a stop-loss just below the resistance level, like Rs. 98, in case the breakout fails. You hold the position as the price trends upward, aiming to capture significant gains before exiting at a target, such as the next resistance level or a predetermined percentage gain. Breakout trading works by capitalizing on momentum when an asset breaks free from its established range, often attracting more buyers and institutional interest.
Support and Resistance Trading Strategy
To set up this strategy, you will have to monitor historical support and resistance levels, buying near support (where prices tend to bounce back up) and selling near resistance (where prices typically face downward pressure), expecting the price to move within this range.
In a support and resistance trading strategy, just focus on key price levels where an asset has historically had trouble moving beyond. For example, imagine a stock that has repeatedly bounced back up whenever it hits Rs. 50 (support) but struggles to rise above Rs. 60 (resistance). In this scenario, you would buy the stock near Rs. 50, anticipating that it will bounce back and move higher while setting a stop-loss slightly below this support level to manage risk.
When the price approaches Rs. 60, you could decide to sell, as this is the established resistance level where the price has struggled to break through. If the stock successfully breaks through Rs. 60, this would signal a breakout, and you may hold the position for further gains. This strategy works by leveraging the psychological barriers of support and resistance, allowing traders to enter and exit positions based on predictable price levels.
Reversal Trading Strategy
This approach focuses on spotting when a long-term trend is about to reverse. You will typically have to enter your positions early, aiming to capture gains from the beginning of a new trend, often using technical indicators like RSI (Relative Strength Index) to identify overbought or oversold conditions.
To play out this position trading strategy, all you have to do is to look for price levels where a stock has repeatedly bounced back in the past, signaling a strong support zone. For example, imagine a stock that has consistently bounced off the Rs. 40 level over the past few months. You as a position trader observing this would wait for the price to approach Rs. 40 again, looking for signs of a reversal, such as a bullish candlestick pattern or a positive RSI (Relative Strength Index) reading. Once these signals appear, you enter a long position, expecting the price to rebound from support and move higher.
To manage risk, a stop-loss is placed just below Rs.40, in case the support level fails to hold. This strategy aims to profit from the asset’s tendency to reverse direction (Mean Reversions) at key support levels, capturing gains from short-term price movements while minimizing downside risk.
Sector Rotation Strategy
This strategy involves shifting investments between sectors based on where they expect growth or decline. This strategy plays in action when you move your capital into sectors poised to perform well over the long term, holding assets until trends suggest it’s time to rotate into another sector.
For instance, during a period of economic growth, you might rotate into the technology, automobile, or consumer discretionary sectors, anticipating that these industries will outperform due to increased consumer spending and innovation. After a few months, if signs of an economic slowdown begin to emerge, you may then switch to utilities or healthcare, sectors that are considered more defensive and tend to perform better in weaker market conditions.
This strategy allows you to capitalize on the cyclical nature of sectors, moving their positions to where growth potential is highest while reducing exposure in less favorable sectors. By using sector analysis and macroeconomic indicators, you can position yourself to benefit from long-term trends across various industries.
We have published a detailed post on this topic, which you can access by clicking here.
Conclusion
While the strategies outlined above may seem too good to be true, they can be highly profitable if executed correctly. However, it’s important to remember that there are no shortcuts in the stock market—it rewards those who approach it with precision and discipline. Like any successful investment strategy, position trading requires patience and a strong belief in the market’s long-term trends.
It’s less frantic than frequent trading but still demands confidence in the direction of the market and the ability to weather various market conditions.
A professional tip: start by mastering one or two strategies before going full throttle on all of them, as this will help you test the waters and maintain your focus.
Frequently Asked Questions (FAQs)
1. What is position trading?
Position trading is a strategy where you hold assets for several months to years, aiming to profit from long-term market trends, rather than quick short-term gains.
2. How is position trading different from day or swing trading?
Position trading focuses on long-term trends, holding positions for months or years, whereas day and swing trading targets short-term price movements over hours or days.
3. What are some common position trading strategies?
Common strategies include trend following, breakout trading, support and resistance trading, reversal trading, and sector rotation.
4. What is the best way to manage risk in position trading?
Managing risk involves setting stop-loss levels, tracking key support and resistance levels, and using technical indicators like moving averages to time exits.
5. Can position trading be applied to different asset classes?
Yes, position trading can be used across various asset classes, including stocks, commodities, forex, and cryptocurrencies, as long as there are clear, sustained trends.
“This information is for educational purposes only and should not be considered investment advice.”
