Investing > Complete Guide to Position Trading

Complete Guide to Position Trading

Day trading isn’t for everyone—so if you can’t afford to spend hours in front of your computer, check out position trading.

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Updated March 09, 2022

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Do you want to make money trading, but don’t have 8 hours a day to devote to the stock market?

You’re not alone. There are many people who want to become investors, but just don’t have the time. With juggling work, families, and the effects of a global pandemic, it’s tough to squeeze in time for activity that requires your full attention.

If that sounds like you, you should consider a simpler alternative: position trading. This particular strategy is considered as the busy trader’s dream; offering flexibility and relatively lower risk that allows you to make it a long or short-term investment strategy, depending on your financial goals.

While position trading isn’t without its risks, many people consider it to be “safer” than day trading, because you can plan to hold positions as long as needed until they become profitable. For beginner traders who are still trying to find their feet, position trading could be an option that offers more security. The last thing a new trader wants is to be like Matthew, who lost over $150,000 of his long-term investment gains when he decided to try day trading.

Whether you’ve been invested in the stock market for a long time, or you are a beginner, position trading may be exactly what you are looking for. In this article, we’ll teach you everything you need to know about position trading, how it compares to other popular trading methods, key risks and benefits, and how you can determine if this is the right type of trading for you.

What you’ll learn
  • What is Position Trading?
  • How Position Trading Works
  • Recognizing the Market Environment
  • Indicators & Strategies
  • Common Markets for Position Trading
  • Benefits of Position Trading
  • Risks of Position Trading
  • How Position Trading Suits You
  • Conclusion
  • Get Started with a Stock Broker

What is Position Trading? 📚

To become a position trader, you need to understand what it is and how it works.

Position trading is when an investor opens a particular position, intending to hold it for a period of time until the price changes in the investor’s favor. Position trading is commonly referred to as a long-term investment strategy, although position traders do not necessarily have to hold their position for a long period of time.

Think of position trading as taking a stand on a particular topic. So, when you open a position in stock trading, you are stating that you believe that the price of a stock will increase or decrease. Opening a position essentially means you are placing a buy order for a particular stock. When you decide to sell the stock, this position is then considered as “closed”.

An infographic illustrating the primary factors of position trading: their frequency, holding period, duration of trading, and means of identification.
Position trading is known to have a specific frequency, holding period, and duration.

Position traders can hold their positions for as short as a few days, or as long as months–maybe even years. This is what sets position trading apart from day trading, as position traders rarely open and close a position in a single day because they are looking for longer-term trends in the market.

Understand How Position Trading Works 👨‍🏫

Position trading might sound simple, but it’s really an umbrella term. There are many different strategies and techniques—let’s illustrate this by jumping into a specific example.

An example of a position trade would be an investor who noticed in February 2020, that because of the COVID 19 pandemic, the world would need lots of food delivery services to deliver meals to people on lockdown.

They would open a position for a company in this sector, such as DoorDash, with plans to hold on to it for a few months while purchases poured in during lockdown. Then, once they reached their desired profit percentage, they would cash out as they would know the world would eventually reopen and people would go out to restaurants once again.

Usually, the goal of a position trader is to receive a profitable percentage of return from a market trend in a stock. So, when the goal is met after they’ve opened a position, they will close out their position and keep their returns. Position traders open positions with long time periods in mind (months, even years) and hardly make regular trades on a daily basis.

A stock chart showing how position trading works.
Position traders ride out the market’s short-term ups and downs while patiently waiting for their longer-term price target to be met.

A position trader identifies market trends through research and watching the news. Take note that position traders are not the same as buy-and-hold investors–as the latter enters the market with an idea of when they will sell in mind, rather than buying a stock they hope will increase in value over the years.

Recognizing the Market Environment 🕵️‍♂️

Busy investors—who have a life outside of their portfolio—tend to prefer position trading because of the hands-off approach it offers. Ideally, all one has to do is study the market’s trends and invest at points of their choosing. But, novice traders may struggle with holding on to their positions, especially when daily price fluctuations take place. This is particularly common when a stock is experiencing a large market correction.

Let’s take a look at an example. In March 2020, many airline stocks experienced a crash due to the COVID-19 pandemic. A position trader may have noticed this, and opened a position on Spirit Airlines(SAVE) when the stock was priced at just $8.69.

Then, the trader would have decided how much they wanted to make from the position trade. They may have decided that if they doubled their investment, they would be happy. Thus, they set an automatic sell order for when the price of SAVE reached $17.38.

SAVE stock reached $17.38 briefly at the end of May 2020, therefore the position would have been closed automatically and the position trader would have walked away with twice what he invested minus platform fees. Therefore this position trade would have taken a total of 3 months to execute. See the chart below.

Stock chart of Spirit Airlines (SAVE) from 2018 to 2022.
Spirit Airlines (SAVE) price chart from 2018 – 2022 (image courtesy of Yahoo Finance).

As you can see from the chart, SAVE experienced drastic fluctuations that could have intimidated newer traders who aren’t used to how the market performs. But more experienced position traders avoided checking their stocks on a daily basis, and simply set up automatic sell points using stop loss orders.

Position trading offers a more convenient approach to investing in the stock market, compared to other common types of trading, mainly swing and day trading.

Swing Trading vs. Position Trading ⚔

Swing trading and position trading are less hands-on than day trading, but that’s as far as their similarities go.

Swing trading, like position trading, includes holding positions for days and weeks at a time, but typically no longer than a couple of months. Although swing traders will look for the same indicators in the market that position traders may, swing traders focus more on medium and short-term gains rather than the long ones. 

Therefore swing trading requires you to check your portfolio more often than you would if you were a position trader, but still presents the same level of risk. One thing is for sure, however, and that is that both methods require much less attention than day trading. 

Day Trading vs. Position Trading ⚖

Day trading is one of the most involved forms of trading in the stock market, and typically requires a trader to be at their computer almost every minute of the trading day. Day trading is characterized by the fact that the trader will open positions during the day and close them all by the end of the day. 

Day traders and position traders are looking for very different things when looking at market indicators. While position traders want long-term trends to open a position on, day traders are looking for a stock that is currently fluctuating which will make them a profit. They may occasionally hold a position overnight to make this a reality, but this is rare.

Day trading is a high-stress trading strategy that most traders consider to be their full-time job. Thus those that enjoy position trading will likely find the attention day trading requires is not for them. 

Indicators & Strategies of Position Trading 📜

Just like any investment strategy, before you take the leap into position trading you need to take a look at the indicators you will want to look for as well as potential strategies to employ. Many investors choose to use more than one indicator, and sometimes more than one strategy, when they engage in position trading, but regardless of the strategy all position traders employ a mix of fundamental and technical analysis. 

Moving Averages 🗓

Moving averages are a technical indicator in the stock market which provides an average of how much a particular stock has moved in price over a specified number of days. This number can be expressed over the course of 50 days, 100 days, or even 200 days.

Most position traders choose to reference the 50-day moving average (MA) as 50 is a multiple of both higher measures of this number. Therefore if they see a trend in the 50 day MA that corresponds with the 100 day MA, this is an indication to them that the stock is on a possible long-term growth trajectory. 

Remember, as a position trader, you aren’t worried about closing your position today, or even next week, which is why the 50 day MA is such a good indicator–because most of these traders plan to hold the position for at least 50 days or longer. But of course, some traders prefer to look at something a little easier to read. 

MACD 📊

MACD stands for moving average convergence divergence and simplifies the MA by showing the movement of the price of a commodity as bars on a chart or a single line. When the MACD crosses zero, this indicates to the trader what is going on in the market.

When a MACD line trends upwards or crosses the 0 line in the positive direction, this is considered a bull market, and many position traders take this as the sign they should open a position on the stock. But if the MACD line is trending downwards, or crosses 0 heading towards the negative direction, they know the stock is experiencing a bear market

If you decide to use the MACD line or bar chart to research your positions, however, know that you must be careful as a large amount of movement in the line, even if positive, can indicate that a stock is quite volatile. This can add too much risk to the portfolio of a position trader who is planning to hold the stock for the long term. 

Support and Resistance 🛡

One of the most common values position traders evaluate when deciding to open and close positions is the support and resistance levels of stock. The support and resistance levels of stock are typically seen as the prices at which a stock will never exceed above nor fall below. 

There are two different ways a position trader will approach support and resistance levels. Some will look for changes in the resistance levels, as these can indicate a long-term change in the trend of the stock. Meanwhile, others will look at the historical support and resistance levels and look for those which show the longest trend at their current levels.

A stock that has been at the same support and resistance levels for a long time is sometimes seen as a less risky buy. Obviously, this doesn’t mean these investments aren’t without risk, it’s just the less risky of the two support and resistance referencing strategies. Precious metals, especially gold, are investments that are commonly seen as lower risk because of their strong support and resistance levels. 

Breakout Trading 📈

Position trading is a diverse trading strategy, and the level of risk you are exposed to will depend on the strategy you choose to follow. The strategy that contains the highest level of risk is breakout trading

When using the breakout trading strategy, a position trader will wait for a specific stock to experience a breakout, also known as a rapid movement in price. They will then quickly open a position if they believe the breakout will continue in a direction that is beneficial to their long-term goals.

Breakouts don’t always last, however, and sometimes there are false breakouts where a price will spike then quickly settle right back where it started. Because position traders like to hold positions for so long, only those who are okay with exposing themselves to lots of risk typically look for breakouts to indicate when they should open a position. 

Common Markets for Position Trading 🗃

Position trading is a bit like the ketchup of the investing world, you can use it with everything! This means that if you are interested in position trading you don’t have to use your strategies on just the stock market. Here’s a little run down of all the markets where investors choose to position trading. 

Stock Market 🏢

Position trading is most common on the traditional stock market, and it makes sense as to why, because there are so many different assets to choose from. Position trading on the traditional stock market can include opening positions on EPTs like ETFs

One of the benefits of position trading on the stock market is you can typically use almost any of the aforementioned strategies, and you can choose your risk based on the position you open. For example, a position trader looking to limit risk could open a position on the S&P 500, which has shown nothing but overall growth for decades and is considered to be a low-risk investment overall. 

But on the other hand, for those investors who would like to expose themselves to more risk but still stay in the traditional stock market, there are other higher-risk assets like penny stocks available. It is this diversity and ease of use (as most platforms allow you to position trade on the stock market with a basic account) that keeps most position traders trading on the stock market. 

Forex Market 💱

The forex market, which facilitates the trading of different currency pairs, is less favored by position traders because of its inherent volatility, but there are some long-term trends in currency that can be beneficial. Looking for these types of trends generally involves watching the news for events that will affect the prices of currency long term. 

One example of this was tracking the British Pound after Brexit when compared to the Euro. Because Brexit didn’t happen overnight, this created an event that caused a trend long enough in this market for position traders to take advantage. 

Trading on the forex market takes a lot of experience and is generally not recommended for beginning traders, especially position traders, as it takes a lot of knowledge to be successful. It is not the riskiest market out there, however, as futures and cryptocurrency typically expose the investor to more than the forex market. 

Commodity Futures Market 🛢

The commodities futures market specifically refers to commodities, such as gold and silver, which are to be delivered on a specific date but have not yet been mined or acquired. These are inherently risky as they are placing an investment on what the investor believes will occur in the future.

Position traders typically only get involved in certain aspects of commodities futures, and this is because they are intending to open positions long term, which narrows down many of the commodities that fit their investing goals. Most commodities futures change price on a weekly or daily basis which is not compatible with the more hands-off approach of position trading. 

There are, of course, some pros to investing in the commodity futures market as a position trader, and this is the fact that the futures contracts are expected to expire on a specific day. This makes it very easy for a position trader to establish the date they will close their position on the commodity. 

Cryptocurrency Market 🪙

Position trading also frequently occurs on the cryptocurrency market, however, out of this entire list, this is the riskiest of them all. Surprisingly, despite this, the cryptocurrency market attracts many position traders who are looking to open very long-term positions. 

The cryptocurrency market contains many projects, many of which are brand new similar to penny stocks. Position traders will take a look at these products, and if they see the potential, they will open a position, intending to hold on to it until the project takes off. 

Investors who intend to hold cryptocurrency must have hearts of steel. Many cryptocurrency prices are highly affected by the news, and even the smallest announcement of international conflict can quickly cause the prices to tumble

Benefits of Position Trading 🌟

Already have an idea of the market you want to open a position in? Well don’t start just yet, let’s take a look at some of the benefits and risks of position trading first.

First of all, if being involved in the stock market stresses you out, position trading is a lower stress approach than many other forms of investing. Rather than having to move large amounts of money each and every day, the position trader opens informed positions and then doesn’t need to check in on them or sell them anytime soon.

And if you hold a position for an entire year or longer, this is beneficial when tax season rolls around as you may get to avoid paying capital gains taxes which can take a huge portion of your investment returns.

Because position trading is a long-term strategy, meaning you will do your research once, and then you won’t have to spend an afternoon on it again for quite a few months. This makes position trading ideal for someone with a busy schedule who doesn’t have the time to devote to investing on a daily, or even weekly, basis. 

But if you have time, this is another benefit of position trading, as you can employ it right alongside other trading strategies. Day traders can continue to day trade while simultaneously opening long-term positions that they intend to keep and earn long-term gains with. 

Risks of Position Trading ⚠

Let’s take a look at some of the inherent risks that come along with position trading. 

The number one risk investors take when engaging in position trading is the fact you can’t predict a certain future. No matter what technical or trend analysis they may perform, they still run the risk that a trend may reverse, or not materialize as they expect. A company can go under at any time. 

Many investors also don’t like how illiquid position trading is. While day traders and swing traders can open and close positions more quickly and easily, most position traders find themselves locked in an investment trying to gain a return. This can make it difficult for them to invest in anything else. 

Position trading is not cheap, and in order to earn a return, you will need a lot of capital to get started, this makes it very difficult for beginning investors to position trade. Not to mention that position trading is very unforgiving, and if an investor opens a position on the wrong trend, this could lead to the loss of a large amount of capital. 

While not necessarily a risk, one final thing position traders need to consider is the fees that will accumulate over the course of their trade. These can add up, and for some smaller capital position trades, and end up taking a huge portion of the returns an investor waited so many years to earn. 

Is Position Investing a Good Fit for You? 🤔

You would never leave the store with a shirt that didn’t fit, and in the same way, you shouldn’t open a position trade without ensuring this is the strategy you want to maintain long term. Here are a few things to look at to ascertain that position investing is really for you:

Your Goals For Investing 🏁

Position trading is ideal for someone who has long-term trading goals because it will likely take weeks or months before you see a return. If you don’t like having your capital tied up, or would rather switch investments frequently, you are better off with swing trading or day trading

Position traders also need to be very patient and have a decent amount of capital they don’t intend to touch for a long time. This means it is not a form of trading you will generally be able to live off of as a form of income in the present. If you intend to live off of investing, position trading is not advised.

The Market Conditions 🔍

Unlike other forms of investing, position trading is generally profitable during a bull market. This is because it is difficult to open new positions based on company growth during a bear market. 

Now, this doesn’t mean you can’t begin trading during a bear market–because you can–but you will need to employ some different methods of knowing which positions to open because the 50-day averages will not be positive during a bear market. Likely this will involve doing a lot of your own research to find a trend and can make position trading riskier. 

Many position traders, when they evaluate the risk involved with position trading during a bear market, or a market that doesn’t seem to be moving at all, come to the conclusion that swing trading or day trading is more to their advantage–as these forms of investing earn a return on small changes in the market trends. 

Your Capital Needs 💰

As previously mentioned, position trading requires a large amount of capital to be successful as these investors are taking advantage of what may be small market trends. In addition to putting a large amount of capital into a position trade, you have to know this money will be inaccessible for a while–meaning you will need other funds to live off of and cover the expenses of your everyday life. 

If you really needed the money, you could close your position of course, but if you enter the position with this exit strategy in mind, it is likely you could lose money position trading. Remember, position trading is keeping your money in a position until it turns a profit, no matter how long that may take, as an early exit strategy could cost you everything.

Conclusion 💬

Overall, position trading is a long-term investment strategy that is well suited for the individual who wants to research an investment, open a position, then leave the money in the position for years to come. This strategy is lower stress when compared to other investment strategies, and doesn’t require an individual to spend hours at their computer every day.

Position trading isn’t for everyone, however, and if you decide it’s not for you–that’s okay, as there are many other ways to get involved in investing without position trading. Just be sure that if you do choose to engage in position trading you pack some snacks because you will be in it for the long haul. 

Position Trading: FAQs

  • How Much Do Position Traders Make?

    Position traders generally do not make returns on a weekly or even monthly basis. For this reason, it is difficult to know how much a position trader makes as their gains from a single trade are usually spread out over multiple years.

  • Is Position Trading Profitable?

    Position trading is profitable but only if it is applied as a long-term investment strategy. It typically is not profitable in the same year a trader begins to use it as an investment strategy. 

  • Is Position Trading Safe?

    Position trading is an investment strategy, and like any other investment strategy, it carries a fair amount of risk. The exact level of risk you are exposed to will depend on the positions you open. 

  • Is Position Trading Better Than Day Trading?

    Position trading and day trading are two completely different investment strategies and the one which is right for you will depend on your investment goals. Many people, however, find position trading much less stressful than day trading. 

  • What Type of Trading is Most Profitable?

    There is no one type of trading that is the most profitable, as the profit you will earn from trading will depend on the assets you invest in. Most investors find that a combination of trading strategies is most profitable. 

  • What is the Difference Between Trade and Position?

    Technically, a trade and a position are the same thing if you only have one trade open. If you have multiple trades (such as multiple buy orders) however, the combination of these together creates a position.

  • Is Closing a Position the Same as Selling?

    Closing a position on the stock market essentially means you are selling the underlying assets involved in holding that position. 

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