What is Positional Trading - Meaning, Strategy and More

The stock market is a place where people can earn income in multiple ways, one of which is trading. But in a world where most people are occupied with their full-time jobs, trading may sound difficult. This is where positional trading comes into the picture.

In this article, we will explore what positional trading is, various strategies for positional trading, its pros and cons, so that we can better plan our investments around it. Let's get started!

What is Positional Trading?

Positional trading is a type of long-term trading strategy that involves creating a position in a security in order to capitalize on its long-term price movements. In this trading strategy, the duration of holding a position can range from a few days and extend up to a year or more in some cases.

As the duration of this trading style involves holding a position for an extended period of time, one can implement this trading style either through the cash market or the futures market. 

When you expect the price of the security to increase, a long position can be entered by buying the security in the cash market or buying its contracts in the futures market. But if you have expectations of the price to decrease, you can only enter a short position by selling futures contracts of that particular security. 

If this trading style is implemented through a futures contract and your target is not yet achieved, you should note that you will be required to roll over the futures contracts if the contracts are near expiry.

Furthermore, this trading style will require traders to have large margins invested in the trades and will aim to capture large price movements in the security. Therefore, positional trading will tend to ignore short-term fluctuations requiring less time to monitor security.

While many prefer to execute positional trades, a major issue they face is the constraint of capital. To tackle this issue, Rupeezy provides margins trading facility in more than 1100 stocks, which allows the traders to buy a larger quantity of stocks even with limited funds. 

Positional Trading Strategies

Now we have covered what is positional trading, let's look at some of the most used positional trading strategy:

Breakout Strategy

More often than not, the price of the security tends to reverse certain levels where a significant price action has occurred in the past. These levels are referred to as the support and resistance levels. In the instances where the price breaks beyond these levels, it signifies the emergence of a new trend in security.

If the price breaks above a well-established level of resistance, one can enter a long position in the security along with placing a stop loss a few points below the resistance level based on your risk appetite.

Chart explaining the resistance breakout

If the price breaks below a well-established level of support, one can enter a short position in the security along with placing a stop loss a few points above the support level based on your risk appetite.

Chart explaining support breakout

The profit target for this trading strategy can be based on your preference. Two ways to book profits in your trade can either be through a risk-to-reward ratio or when the price reaches the immediate level of support or resistance.  

Reversal Strategy

As mentioned earlier, the price tends to reverse when it reaches a significant level of support or resistance. If the price shows a sign of reversal pattern from the levels of support or resistance, one can place an appropriate trade and capitalize on it.

If the price starts reversing from a level of support, one can enter a long position in the security along with placing a stop loss a few points below the points of entry.  

If the price starts reversing from a level of resistance, one can enter a short position in the security along with placing a stop loss a few points above the points of entry.

Chart explaining reversal from resistance

Similar to the breakout, the profit target for reversal trading can be based on the risk-to-reward ratio or the immediate level of support/resistance.

Pullback Strategy

Pullback refers to the temporary reversal in the security from the direction of the original trend. These pullbacks can occur due to the profit booking by the traders who captured the trend during its initial phase.

As the price tends to continue in the direction of the original trend after the pullback, it creates a perfect opportunity for traders to catch on to the trend. There are various ways in which one can trade pullbacks, some of which include using trendlines, simple moving average, exponential moving average or the Fibonacci retracement tools.

The appropriate tool to be used for this strategy will depend on the way in which the uptrend or the downtrend has occurred. 

If the price of the security shows signs of a resumption of the uptrend after a downward pullback, one can choose to enter a long position in the security while placing a stop loss a few points below the point of entry.

Chart explaining uptrend continuation after pullback

Similarly, if the price of the security shows signs of a resumption of the downtrend after an upward pullback, one can choose to enter a short position in the security while placing a stop loss a few points above the point of entry.

Chart explaining downtrend continuation after pullback

The profit booking in this trading strategy can be based on the trailing stop loss method or you can also ride the wave until the price breaks the original trend.

Moving Average Crossover Strategy

The moving average is a prominent indicator used among novice as well as experienced traders. In positional trading, one can use the combination of a 50-period moving average along with a 200-period moving average in order to identify trends in security.

When the 50-period MA crosses above the 100-period MA, especially after a downtrend, it implies that a bullish trend can occur in security.  This strategy is also referred to as the golden cross strategy.

Here, one can enter a long position of the security when the price is trading above both the moving averages and also place a stop loss a few points below the crossover point. You can hold on to this long position as long as the price remains above the 200-period moving average or book your profit based on the trailing stop-loss method.

Chart explaining golden crossover strategy

When the 50-period MA crosses below the 100-period MA, especially after an uptrend, it implies that a bearish trend can occur in security. This strategy is also referred to as the death cross strategy.

Here, one can enter a short position in the security when the price is trading below both the moving averages and also place a stop loss a few points above the crossover point.  You can hold on to this short position as long as the price remains below the 200-period moving average or book your profit based on the trailing stop-loss method.

Chart explaining death crossover strategy

Event-Based Trading Strategy

Event-based trading is typically a short-term positional trading strategy that involves taking advantage of the price movements that occur before or after the announcements of any corporate or economic events. Some examples of these events include announcements of stock splits, earnings, takeovers, budgets, and so on.

When you expect a particular event to have a positive impact on the stock, you can enter a long position in the stock with the expectation that the positive event will be accompanied by a rise in price.

Similarly, when you expect a particular event to have a negative impact on the stock, you can enter a short position in the stock with the expectation that the negative event will be accompanied by a decline in price.

Furthermore, one should note that technical analysis often doesn't work when security is influenced by a significant event. Thus, one should follow a strict risk-to-reward ratio while placing event-based positional trades.

Pros & Cons of Positional Trading

Now that we covered the meaning of positional trading and the various strategies one can employ in positional trading, let us look at the pros and cons involved in executing positional trades.

Pros

• Since the duration of positional trading is long, traders can ignore the short-term fluctuations in a stock.

• Traders require very little time to monitor stocks as positional trading is carried out on a larger timeframe.

• Because of the duration of the positional trading, the returns generated can be huge. 

Cons

• In Positional trading, one is required to park a large amount of capital in a single trade for a long period.

• As positional trades are held for longer than a day, traders are exposed to overnight risks which might result in huge losses.

• As a large amount of capital is parked in a single trade, traders will miss out on multiple trading opportunities. 

Positional Trading vs Swing Trading

While positional trading and swing trading share similar characteristics and trading strategies, the main factor that differentiates both is their timeframes. While positional trading is carried out between weeks to months, swing trading is carried out between a few days to a few weeks.

This brings us to the second differentiating factor which is the short-term price fluctuations. Due to the duration of the positional trades, traders can ignore the short-term price movements in the stock while, traders who are swing trading will need to consider the short-term price fluctuations.

Furthermore, due to the duration of the trades, one need not constantly monitor a stock while positional trading. On the other hand, traders will need to invest more time while executing swing trades.

Lastly, positional trading aims to capture the large price movements that might occur in the security, while swing trading focuses on capturing more number of shorter price movements.

Conclusion

In conclusion, this article covered the meaning of positional trading, its strategy, pros and cons. We also delved into the differences between positional vs swing trading. While positional trading might seem straightforward and easy to execute, it does come with its own set of risks. So, it's crucial for traders to consider all factors and have solid risk management strategies in place to protect themselves if things don't go their way.