Position trading is a popular trading style used by stock traders which seeks to capture a larger portion of the trend than what swing trading does.
The time frame for position trading is much longer than that for swing trading which makes this style of trading suitable for those with limited spare time. The time required for trade selection and trade management is considerably reduced compared to other trading styles such as day trading and swing trading.
Position traders basically look to capture as much of an intermediate-term trend as possible. This means the position trader holds their position through the short-term corrections rather than exiting on these corrections as the swing trader does. A position trade can be thought of as a sequence of rallies and pullbacks and the position trader will hold their position until this trend appears to be completed. While the swing trader is only after one swing within an intermediate-term trend, the position trader generally seeks to capture most of the intermediate-term trend.
The term ‘position’ simply means to take a position in a stock and ride the trend for as long as it continues before being stopped out.
Position traders tend to spend most of their time on the long side, but they will short sell during bearish market conditions. Like most other styles of trading, position trading is more profitable when traded in the direction of the market. Bull markets are considerably longer than bear markets and this explains why position traders spent most of their time trading long.
Position trading concepts can be applied to any time frame such as intraday, daily, weekly or even monthly. Charts displaying daily bars are used by end-of-day traders seeking the intermediate-term trends and charts with 5 minute bars are used by day traders to capture the intraday trends. Weekly bars are not as popular but they are quite useful for stock traders and even stock investors who are seeking to participate in a long-term trend. Monthly bars are mostly used to get a long-term prospective of the stock rather than for trading purposes.
An example of a position trade using daily bars is shown in Chart 1. The entry is taken from a breakout from a Wedge chart pattern.
Chart 1. Position Trade Entry – Long position
Chart by stockcharts.com
Position traders use technical analysis techniques such as chart patterns and chart indicators to evaluate their proposed trades and to manage any open positions.
Some position traders favor chart patterns and use them almost exclusively while only using some basic chart indicators for their analysis, while other position traders prefer to use chart indicators almost exclusively. Some position traders will use all of the technical analysis tools available to them. Which technical analysis tools to use is a personal preference and there is no right or wrong approach.
The series of articles on Position Trading Tactics gives numerous examples of position trades taken from the magazine issues.
Generally position traders who base their trades on a chart pattern will use the low of that pattern to place their initial stop-loss (which is usually a small distance below that low for a long side trade). Position traders who base their entry on a signal from a chart indicator tend to use the chart indicator to signal an exit rather than placing an initial stop-loss.
Trailing Stop-Loss
Most position traders who based their entry on a chart pattern will use some form of trailing stop-loss. The trailing stop-loss generally needs to remain some distance below the current price bars so as to give the stock sufficient room to pullback otherwise the position trader will be constantly stopped out on a good uptrend. Some common methods of managing a trade with a stop-loss are:
Common stop-loss methods:
- Moving Average Cross Over: With this method, the trader plots two moving averages on their chart and an exit signal is given when the two moving averages cross over each other. The moving averages can be of any length. A popular setup is to use a 10-day for the shorter moving average and a 30-day for the longer moving average. It’s also common to use Exponential moving averages (EMA) rather than simple moving averages.
- Pullback Low: This method gives a lot of room for the stock to move and simply uses the relative lows of an uptrend as the trailing stop-loss. When the stock makes a new pullback and then rallies, the low of this higher pullback becomes the new value for the trailing stop-loss. Using a 10-day simple moving average helps to indentify the pullback lows. An exit signal is given when the stock closes below the trailing stop-loss.
- Parabolic SAR: This method uses the chart indicator to determine the trailing stop-loss level. The parabolic SAR variables can be set so that it gives the stock some room to move and is quite an effective and easy trailing stop-loss tool to use. An exit signal is given when the SAR indicator plots its Dot on top of the Bar instead of the bottom.
The Moving Average Cross Over stop method for the Amazon.com trade example in Chart 1. is shown below in Chart 2.
Chart 2. Moving Average Cross Over stop method
Chart by stockcharts.com
The Pullback Low stop method for the Amazon.com trade example in Chart 1. is shown below in Chart 3. (Note that in this example the stop has not triggered).
Chart 3. Pullback Low stop method
Chart by stockcharts.com
The Parabolic SAR stop method for the Amazon.com trade example in Chart 1. is shown below in Chart 4.
Chart 4. SAR Indicator stop method
Chart by stockcharts.com
Some traders will ride the trend as far as they can using a stop method while others will exit their position at a chart pattern price target. When exiting at a price target, some position traders prefer not to use a trailing stop-loss as this can prematurely exit their position before the price target is reached.
Entry Trigger
End-of-day position traders base their trading decisions on the daily charts. Once an entry is triggered on the daily chart by either chart pattern or a chart indicator, the position trader places an entry order to be executed the next trading day. Some position traders simply place a market order which will be executed as soon as the market opens. The disadvantage with placing a market open order is that the Bid-Ask spread at the open is usually extremely wide and gives the position trader a poor entry price.
The market order can be placed with a time delay so the order is executed at a set time after the market opens. Position traders who use time delay orders tend to set the time to around an hour after the market opens.
Exit Trigger
The trade exit for a stock that reaches its price target can be triggered intraday or end-of-day. If the position trader places a limit sell order for a long side trade, the sell order will be filled during the trading day when the stock price reaches the limit order price. If the position trader instead monitors the daily closing prices and waits for the stock to close above the price target, a market sell order needs to be placed for execution the following day (like the market buy order used for the entry).
Generally if a price target is used it is easier to place a limit sell order and this will ensure that the target price is received. With the closing price method, the price obtained could be higher or lower and the stock may not even close above the target price even if the stock trades above it during the day.
For position traders who are using a trailing stop-loss they have the same two options for placing their stop-loss sell order – an intraday trigger or an end-of-day trigger. If the position trader places a limit sell order, this order will fill during the trading day whenever the stock price trades to that limit price. The disadvantage with this method is that the stock will frequently trade below the stop-loss level but will close above it. This means that the position trader will be stopped out more frequently. With the end-of-day method, the position trader monitors the daily chart and an exit is triggered when the stock actually closes below the stop-loss level. To exit the trade, the position trader places a market sell order to be executed the following day. This order can be time delayed so that it executes after the market has opened.
Short Selling
Position trading on the short side is essentially the inverse of trading on the long side. The first consideration is that the position trader requires a trading account which allows short selling. The risks are higher with position trading on the short side.
Traders need to be aware that there are additional
risks associated with short selling
Position trading in general is a moderate risk trading strategy providing that all losing positions are exited at their stop-loss levels. The risks with position trading increases when losing positions are not exited and instead held with the hope that prices will return to their entry price so that the position trader can exit at breakeven.
Most position traders prefer not to short sell during bull markets since most stocks are in an uptrend and position trading works best when trading with the broad market sentiment. Bear markets do provide opportunities for short selling since the broad market is heading downwards, but caution needs to be exercised by the position trader since bear markets are relatively brief in duration compared to bull markets.
Long-Term Position Trading
The weekly bar chart provides the position trader with a method of participating in the long-term trend. This style of trading is essentially passive and involves the least amount of time in trade selection and position monitoring. Position traders who do not have the time to actively trade tend to prefer the long time frame of weekly charts.
Stock investors are also attracted to weekly charts as it provides a long-term view of their investments. Some stock investors participate in short-term investments with the view of riding the uptrend of a stock and exiting when the uptrend ceases. These stock investors are active investors rather than buy and hold investors and will included fundamental analysis and technical analysis into their decision making process. This combination of fundamental analysis and technical analysis with a weekly bar chart is sometimes referred to as technical investing or speculative trading.