Position traders hold on to their positions for a long period of time, usually months with the expectation that the stock price will increase over time. It is a very popular trading strategy.
Position trading is different from a buy and hold investing strategy. The buy and hold investor builds a portfolio to achieve a long term goal like child’s education, retirement etc. A position trader spots a trend, buys a stock based on the trend and waits for the trend to peak so that he can sell and book profit. Position traders can take both short and long positions.
Understanding Position Trading
Let us understand the concept with an example. Harshad buys 100 shares of ‘John Black Ltd’ at Rs 800 per share on 26 November. He holds on to the stock. A few months pass and on 22 February the stock price is Rs 1,400. Now Harshad sells the stock and makes a profit of Rs 60,000 [(1,400-800)*100]. In this example Harshad bought the stock and held on to it for a few months before selling it off and booking profit. This is a position trade.
Position traders use fundamental analysis and technical analysis to make their trading decisions. They also depend on macro economic factors and general market trend to select the stocks to invest in. They are passive traders who don’t spend all day watching the markets on their computer. Position traders are not bothered by short term movements. They have a long term perspective.
Advantages and Disadvantages of Position Trading
| Advantages | Disadvantages |
| It takes less time to do position trading. This can be done with a full time job. | It locks capital for a long duration. |
| Since it has a long term horizon, the potential to make substantial profits is huge. | A sudden trend reversal can lead to large losses. |
| As position traders use fundamental and technical analysis, the trading strategy is more robust. | Position trading needs discipline and patience to bring best results. The trader needs to trust the strategy and not be affected by short term movements. |
Should you indulge in position trading?
This depends on your temperament, personality as a trader and financial goals. If you have limited time and have monetary capacity to hold stocks, then you can indulge in position trading. Position trading gives best results in a bull market where stock prices are consistently moving upward. It is not suitable for a bear market or when the market is flat or heading sideways.
