What’s “Position” in Position Trading?

If you are curious to know what position trading is, then first you need to calm yourself down. Yes, the stock market is loud and full of FOMO (Fear of Missing Out).

Every day, you see charts flashing red and green. You might have also observed "experts" on TV shouting buy or sell. It can feel like you need to act right now or you’ll miss out. This frantic energy is the world of day trading. But what if there is a more "chill" way to navigate the markets?

The goal in certain trading strategies is not to catch tiny, stressful sprinkles, but to ride massive, long-term waves.

This is the world of position trading. In a position trading strategy, you need to understand that it values patience over panic and strategy over speed. However, position trading is not about blindly "buying and holding". The smartest players use a powerful combo such as FA (Fundamental Analysis) and TA (Technical Analysis).

What Exactly Is Position Trading?

The core positional trading meaning is simple. It is a trading style where a trader can hold a position for an extended period; think several weeks, months, or even years.

An analogy here might help you understand the position trading strategy better. You can consider day trading like a T20 cricket match. It is high-powered, risky and over in a few hours. However, position trading is like a Test match. It is strategic and played over a longer duration. Thus, it is the test of your patience and not your reflexes.

A position trader might not care about what the market did today or what it might do tomorrow. All they care about is the primary trend. Let us look at the two tools used in a position trading strategy i.e., FA and TA.

The Detective Work in Fundamental Analysis

You’re planning to take a long-term position trading hold. But before that, you need to know what you are buying. It is similar to getting into a multi-year partnership with someone without a background check.

FA can help you with this background verification. It is like doing "detective work" on an asset. Here, you need to find answers to a few specific questions.

• Is this company actually making money? Here, you look at its balance sheet and profit/loss (P&L) statements.
  
• Is the business drowning in debt? High debt can be a red flag. Therefore, you need to keep an eye on debt numbers.
  
• Does it have a "moat" or a unique advantage? You can understand this better by learning about the products, services and technology that the company offers.
  
• Is its management team solid? A strong leadership can make or break the business.
  

You can think of FA as an assistant to shortlist high-quality companies for your "shopping list". In position trading, you will be invested in these companies for a long period. So, doing your detective work is important.

Checking The Weather Report With Technical Analysis

You might have found a solid company with your detective work using FA. But is that enough to make a buying decision right away?

Not so fast.

What if that company's stock is at an all-time high?

What if it is in the middle of a short-term panic sell-off?

You can think of TA as the "weather report" for the market. It takes the help of charts to study price action and trends. For position trading, you are not looking at 5-minute charts. Instead, you are looking at weekly or monthly charts. Just like FA, here too there are specific questions you need to find answers to.

• What is the big-picture trend? Is the price on an "up" escalator (an uptrend) or a "down" one (a downtrend)? A position trader would only want to ride the "up" escalator.
  
• Where are the "floors" and "ceilings"? TA can identify support (floor) and resistance (ceiling) levels.
  
• How is the market going at the time you are planning to enter? Is there a bull or a bear domination? You need to make sure if this is the right moment to enter the market in position trading.
  

Ultimately, you want to buy that great company when it is on "sale" (e.g., pulling back to a major weekly support level) and not when everyone else is buying at the peak.

The Perfect Partnership of TA & FA Forming the Position

The most robust position trading strategy does not use FA or TA. It uses FA and TA.

1. FA will create your watchlist - You find 5-10 fundamentally rock-solid companies that you would want to own.
2. TA will time your entry - You wait patiently. You can watch those 5-10 stocks. When one of them pulls back to a major long-term technical level (like its 200-day moving average), that would be your trigger.

Your FA can give you the conviction to hold the trade. So, even if the stock drops 5% in one week, you would know that it is just market noise! You will not panic because you know the company is solid.

Similarly, your TA can give you the timing. It can stop you from buying a great company at a terrible price. This can give you a better risk-versus-reward setup from the start.

This is the actual professional positional trading meaning.

Calm Yourself Down For Position Trading

The position trading style is a task of patience. You are only making a few high-quality decisions per year. You need to:

• Let your research (both FA and TA) guide you.
  
• Set your trade.
  
• Let the long-term trend do the work.
  
• You can check in on your positions weekly or monthly, and not minutely.
  

Kotak Neo is built on an over 30-year legacy of trust and already serves over 5 million customers. It provides the stability and security you need to focus on the big picture. So, if you are ready to start your position trading journey on solid ground, open a demat account with Kotak Neo and start picking stocks.

Source:

Investopedia
ForexDotCom
Kotak Securities