Position trading is great for traders who love analysis but may not have as much time to devote to constantly monitoring stocks. Here, I’ll guide you through the ins and outs of position trading, including what it is (and what it isn’t), whether it could right for you, and how to get started.
When it comes to trading, do you go long or short?
Download the key points of this post as PDF.
Personally, I identify as a short-term trader. I mostly rely on day trading and swing trading as my key strategies for trying to gain profits. In general, long-term investments often don’t have enough action or reward potential for me.
Position trading, however, can be an exception …
Position trading is a unique type of trading that is characterized by longer holds of the security, yet it employs many of the same fundamental research methods as shorter-term trading.
It’s an approach that’s great for traders who love analysis but may not have as much time to devote to constantly monitoring stocks.
Here, I’ll guide you through the ins and outs of position trading, including what it is (and what it isn’t), whether it could be right for you, and how to get started.
Table of Contents
- 1 What is Position Trading?
- 2 3 Ways to Know if You Should Go Long or Short
- 3 Position Trading Strategies: Finding the Best Opportunities
- 4 Position Trading Tips
- 4.1 Pay Attention to Stock Market Trends
- 4.2 Minor Fluctuations Can Turn Into a Full Trend Reversal
- 4.3 Think Long Term
- 4.4 Analyze the Company’s Quarterly Reports
- 4.5 Specialize in One or More Stock Market Sectors
- 4.6 Set a Proper Stop Loss and Don’t Get Stopped Out Prematurely
- 4.7 Set a Trailing Stop Loss and Ride Big Trends
- 4.8 Master Your Skills With Seasoned Mentors
- 5 The Bottom Line
What is Position Trading?
Position trading is a long-term approach to trading. Rather than ‘ready, set, go,’ it’s more like ‘ready, set, stay awhile.’
Position trading focuses on long-term trends. As an investor, you try to choose a stock that will benefit over time from a long-term trend that you’ve identified and invest while keeping a watchful eye on the security.
The timeline isn’t set in stone, but you might hold a position for a period of weeks to a few months to even years long.
In an effort to ensure that your investment can pay off over time as a position trader, you need to put a lot of emphasis on fundamental analysis.
Plan to commit to doing plenty of research about potential companies, sifting through press releases, earnings reports, and analyzing charts before making decisions about which stocks to trade.
As a position trader, rather than looking at short-term peaks and valleys in a stock’s performance, you rely more on data like weekly and monthly charts when looking at the market. You want to identify longer-term trends rather than quick ways to potentially profit off of brief market fluctuations.
Think of position trading this way: it’s essentially the last level of trading before you’d call it long-term investing.
The key difference between position trading and long-term investing is that the latter is only a long-term position, whereas the former can be a long-term position, but depending on the trajectory of the trend, it might not be.
Why Investors Use Position Trading
This is a simple-yet-important fact: If you want to be a successful trader, it’s important to figure out what type of trading is best suited to your style.
This is usually the sum of various factors, including but not limited to:
- The size of your account
- The amount of attention and time you can devote to trading
- How fast you want to grow your account
- And, of course, your risk tolerance
Your trading experience also matters. I wouldn’t tell anyone to jump right in and try to take advantage of premarket trading, for example, because that’s a more advanced technique that requires experience and prowess.
So what about position trading? As a trader, what might entice you to try this style?
For one thing, position trading is fairly accessible to new traders. The pace isn’t as frantic as day trading or swing trading, so you have a bit more time to plot your course of action and create a trading plan.
Position trading is also less demanding on a day-to-day basis. You don’t have to be as obsessive about watching charts on a daily and hourly basis. Rather, you’ll check in on your investment to make sure it’s performing according to the trend you’ve identified.
On a broader level, position trading can also be more appealing in different types of markets.
For example: If we’re in a bull market where there are strong emerging trends, it can be a good time to engage in position trading.
On the other hand, if it’s a bear market, taking advantage of smaller fluctuations by day trading might be more advantageous.
So this gist here is this: Whether you identify as a short-term trader or a long-term one, the market may dictate that you should step out of your comfort zone to take advantage of the current market conditions.
The Difference Between a Long and Short Position
Day trading is kind of like the dating app Tinder, whereas position trading is more like Match.com.
In position trading, you’re looking for a relationship that’s not just a hookup or a fling. But then again, it’s not like you want to get married right away (we’ll leave that to the buy-and-holders, aka the eHarmony of trading).
As a position trader, you’re looking for stocks that you can stick with for a while in hopes of profiting off of a longer-term trend.
You’re devoting yourself to research and taking a very deliberate approach to picking out stocks. You’ll need to settle on a sector, identify strong candidates, then carefully use technical and fundamental analysis to narrow down your choices.
You’ve got to dig deep to understand the company, including its happenings, earnings reports, and history. You’re trying to see if they’re in it for the long haul.
On the one hand, position trading seems like the opposite of day trading. The holds are far longer, and you’re looking for sustainable trends rather than brief fluctuations that may have nothing to do with what type of company is offering the stock.
However, the two styles are actually more similar than they might seem. While the goals and duration may differ, what is similar is the reliance on patterns and research.
In both short-term trading and position trading, you’re looking for predictable patterns and trends to inform your investments.
However, in position trading, you’re looking for a trend that can raise the company and stock’s value long term, and in short-term trading, you’re looking for spikes and dips that are predictable but may not have much to do with the company behind the stock in question.
For example: You might swing trade the same company multiple times. You probably wouldn’t do that with a positions trading stock.
3 Ways to Know if You Should Go Long or Short
Should you go long or short? Well, only you can answer that. However, here are some questions to ask yourself to help you decide which approach is right for you:
What’s your timeline? Every trader is different, and it can take varying amounts of time to find your stride. But in an ideal world, what are your goals as a trader?
Are you looking at saving for the long term (like retirement), or are you trying to build a new source of income, like, yesterday?
If you’re looking for quicker results, position trading may not be the right choice for you.
Personally, I like short-term investments in penny stocks because I consider this one of the fastest ways to grow an account.
However, this isn’t the case for everyone. Plenty of my students take the knowledge they learn in my Trading Challenge and apply it to position trading.
If a longer approach that doesn’t require as much constant attention seems more desirable to you, then position trading can be a great way to take advantage of short-term trading strategies and research methods and apply them to longer trades.
Are you technical? The basic idea behind position trading is that you want to identify trends and take advantage of stocks that are poised to benefit from them.
A position trader wants to identify trends early and to determine if they are built to last. This requires a lot of technical analysis.
As a position trader, you’ll look at longer-term analysis — including 200-day moving averages — rather than the 10-day or even hourly averages that shorter-term traders pore over.
You’ll depend on your careful research to determine entry and exit points and stop-loss levels. If getting geeky about the technical stuff sounds great to you, then position trading may be a good fit.
Do you want action? If you enjoy the slow-but-steady approach and have the patience to monitor a stock’s progress over days, weeks, and even months without panicking over little swings in price, position trading may be well suited to you.
If that sounds boring and you’re craving more action, then swing trading or day trading might be better suited to your style. You’ll gain the market action and can focus on shorter trends and more immediate fluctuations.
Regardless of whether you go long or short, consider these things:
A Planned Entry
With position trading, a carefully planned entry is super important. You’ll need to feel confident that the trend will continue an upward trajectory. You should feel good about investing in a stock.
For example, one popular method of entry for position trading is to wait until the price crosses a milestone, such as breaking the 200-day moving average.
A Planned Exit
Don’t forget to consider your exit, too. With position trading, it’s important to have an idea of when the trend begins to reverse so you can get out of your position.
For example, one popular method of exiting a position is to wait until the price closes below the 200-day moving average.
Even though you probably won’t experience the same massive spikes and declines that famously characterize short-term trading, it’s still important to look at price fluctuations.
One of the biggest risks and hardest things to balance with position trading is that you have to have the patience to weather fluctuations in a stock’s price.
However, you also have to be able to identify when they’re passing dips in the price, and when they signify a trend reversal. That’s not always easy to do.
For that reason, many position traders will use order types like stop losses or a trailing stop to protect their investment and minimize potential losses.
Position Trading Strategies: Finding the Best Opportunities
Curious about delving a little further into position trading? Here are some common strategies for finding stocks to trade in this longer-term approach:
Fundamental analysis is hugely important to position trading. It’s necessary to help figure out if a stock can potentially perform as you hope it will.
Below you’ll find some of the key things to look for as part of your analysis:
Support and Resistance
Considering support and resistance is important for any type of trading, including position trading.
Support and resistance are important for helping you follow the traditional stock market technique of buy low and sell high. Simply put:
- Support is the point at which the price of a stock stops falling.
- Resistance is where the price of a stock stops rising.
On a stock’s chart, you can monitor when a stock is breaking support and resistance. They are highlighted with lines called trend lines; depending on how these trendlines move, you can begin to determine the highs and lows of a trend. Often, this is correlated to where traders might choose entries and exits.
This post details more of the basics on support and resistance and how to use them as part of your research.
Short-Term Position Trading
Can position trading ever be short term? You bet your loss-cutting bottom dollar.
It’s less about the duration of time you hold and all about the duration of a trend.
Position trading has a reputation for being longer term because trends often have a duration of weeks or months. However, this doesn’t mean it’s set in stone.
Position trading may have a long approach, but as an investor, you have to be willing to cut losses quickly and take a much shorter-term position if you think that the trend is reversing and your investment could be in peril.
How can the Forex market play into position trading? In a few ways.
For one, looking at the foreign market can give you a more global view of the market at large. When there are big policy changes or world events, it can have an effect on currency and global trends. This can spell out big global movement in the markets.
Since the markets are intertwined, this can cause trends that can affect the U.S. market, so even if you’re not investing internationally, you can still look at the Forex markets as part of your research for position trading in the U.S.
It can also alert you to opportunities overseas. If there’s a fundamental, economy-changing trend, it may mean that it’s time to invest overseas, applying position trading basics.
You can read more about the Forex market in this post.
Breakout of a Long-Term Range
The first rule of Fight Club — I mean the stock market — is that the stock market is always changing.
Sometimes we’re in a range market, where prices bounce between lows and highs; other times we’re in a trending market, where prices will either ascend or descend more steadily.
When in a range market, eventually there will be a break. This is something that can work to your advantage as a position trader.
In a range market, a lot of traders will tend to go long on support and short on resistance, and will likely put their stop-loss below support, yet above resistance. After a while, it becomes a kind of stop-loss twine ball that will only increase in size as more traders get in on the action.
Then, eventually, the market will experience a breakout. That’s when position traders will buy in, and the breakout acts as the catalyst for a big new trend.
The First Pullback
Pullback is the phenomenon when the price briefly moves against the trend before reverting back to the trend trajectory. This is another important thing for position traders to look at, particularly the first pullback following a breakout.
So, you’ve had the breakout, and you’re noticing a trend. If you didn’t get in right away, you want to have your eyes on the prize: the pullback. This is when you can gain a good entry to your trade.
Position Trading Tips
Keep these tips in mind to further refine your position trading …
Pay Attention to Stock Market Trends
Trends are the bread and butter of position trading. To increase your odds of success in position trading, you need become obsessive about identifying trends.
Look at the market. Read the financial pages. Read analyst reports. Read the world news. Follow foreign markets.
Keep track of potential emerging trends in your trading journal. You need to keep track of the trends to be able to monitor them most effectively.
Minor Fluctuations Can Turn Into a Full Trend Reversal
Who remembers Crystal Pepsi? Trends can be fickle: sometimes they can continue for years, and sometimes they’re a real flash in the pan.
As soon as you start to see minor fluctuations in your stock’s price, be very cautious.
Yes, it could be a minor fluctuation. Or, it could be like in movies, when you first see a dribble of water and then the whole dam bursts.
Price fluctuations could turn into a full trend reversal and spell out big losses.
Think Long Term
This might sound painfully obvious, but it is worth noting: With position trading, you have to be willing to commit to your investment.
Say you’ve identified a trend and you’re ready to trade. From this point on, it’s almost like having a new plant: you might not need to actively care for it 24/7, but you’re going to have to water it on occasion.
You’ll have to monitor this stock’s progress over time and stay on top of fluctuations so that you can hopefully avoid any descents that can cause you to lose money.
Analyze the Company’s Quarterly Reports
With position trading, it’s not just good enough to identify a trend and buy up a company’s stock. You must strongly consider the company in question since you might be sticking with this stock for a while.
This is where the quarterly earnings report comes into play.
The quarterly earnings report is sort of like the trader’s fundamental research bible. It includes information like net income, net sales, earnings from operations, and the EPS (earnings per share). It’s a great resource that can tell you a lot about a company’s health.
It can also tell you about potential trends. Is this company meeting projected earnings, or exceeding them? This could be more proof in the pudding to support the trend (and stock) gaining momentum.
Specialize in One or More Stock Market Sectors
If you’re just looking around the stock market for potential trends, you’ll probably get overwhelmed really fast …
Don’t make things harder on yourself than they have to be: To start off right in position trading, begin to narrow down your choices by settling on a sector.
According to Investopedia, “A sector is an area of the economy in which businesses share the same or a related product or service. It can also be thought of as an industry or market that shares common operating characteristics.”
Sectors might include things like healthcare, energy, and technology. By first focusing on a particular sector or two, you can begin to follow the news and trends there, which will make it easier to identify front-runner stocks to trade.
Set a Proper Stop Loss and Don’t Get Stopped Out Prematurely
A stop-loss order (also called a stop order) is a type of order where you buy or sell a stock when it reaches a specific price, which is called the stop price. Once the stock reaches that price, the stop order is filled as a market order.
Because a position trader may not be monitoring stocks as immediately and closely as, say, a swing trader, it can be helpful to place a stop loss so that the stock doesn’t tank without you knowing it.
However, you want to be careful about your stop loss, because you don’t want a temporary dip to shut you out of potential profits.
Where the stop loss is placed depends on various factors, including the market’s volatility and the stock’s past performance.
Be sure to check out this post for more information and tips on how to set a stop loss.
Set a Trailing Stop Loss and Ride Big Trends
A trailing stop is a type of stop order that you can set within a percentage range of the stock’s current market price. It has a little more wiggle room and flexibility than a stop-loss order.
Unlike stop-loss orders, trailing stops don’t have to be manually reset. They also allow you a little room to ride the waves of the trend a bit easier.
Master Your Skills With Seasoned Mentors
There’s more than one way to forge a successful career as a trader. However, regardless of whether you want to take a long or short position, you need to learn and understand certain market basics before you start trading.
If you don’t take the time to build up your trading skills, you’ll likely lose a lot of cash while you learn things the hard way in the market.
Trading classes can help bring you up to speed so that you can start your trading career with greater know-how and confidence.
I created my Trading Challenge so that you don’t have to learn things the hard way. This is the resource I wish I’d had when I was first starting out as a trader!
My Challenge is designed to offer a working education, meaning you can put your newfound trading skills to work quickly. I’m right there trading with you and my students, sharing every trade to help inspire and educate you.
The Bottom Line
Every investor naturally gravitates toward a slightly different style (or styles) of trading.
Depending on your personality, the amount of time you have to devote to trading, and your risk tolerance, position trading could be a great method of investment for you that allows you to incorporate long-term holds with short-term trading strategies.
Position trading is well suited to people who love to geek out over fundamental analysis but who also have the patience to monitor their position over time. If that sounds like you, position trading might be a great fit.
Have you tried position trading?