I have been involved in the stock market for 35 years. I hope you enjoy my articles about stocks and financial topics.
The Position Trading Strategy
Learning about position trading strategies is key to anyone interested in trading stocks in the stock market. Position trading can be a highly profitable way to trade stocks for stock market traders who do not have time to constantly keep track of their stock positions. Position trading is a strategy in which a trader buys or sells short a position in a stock prior to a pending stock-specific event to take advantage of an anticipated move higher or lower in the price of a stock. Position trading is not a difficult stock trading strategy to grasp, what is difficult is finding suitable position trading opportunities and implementing the position trading strategy correctly.
Implementing Position Trading Strategies
While the media is full of stories of day traders making thousands of dollars a day scalping profits from extremely short term stock trades and hedge funds using high frequency trading strategies to reap quick profits from thousands of stock trades per day, the fact is that most individual investors do not have the time or equipment necessary to engage in these speculative trading practices. Position trading strategies are more suitable for individual investors that want to try making money trading stocks, but cannot commit the time or resources to day trading or high frequency trading strategies.
These are the steps involved in position trading:
- Identify position trading opportunities, which can include a wide variety of potential stock moving events, including but not limited to: new product rollouts, seasonal events (such as seasonal sales spikes), anticipated government policy changes, company events (such as industry conferences), and company earnings reports.
- Buy or sell short (short if you are anticipating a price drop) a stock position far enough in advance of a potential stock moving event to take advantage of anticipation buying or selling that may start causing the stock’s price to increase or decrease prior to the expected event.
- It is important to set a stop loss to preserve position trading capital. A stop loss order should be entered to protect a stock position from unexpected events that cause a move in the stock’s price that is not anticipated. A stop loss order is particularly important when position trading, since position traders do not have the time to constantly monitor the news flow associated with a stock that they hold a position in. A stop loss will limit any unexpected losses and help a position trader sleep better at night.
- Set a realistic sell or buy to cover target price by using a limit order, so that if the position trade reaches the anticipated price level, the position trade will be automatically closed and a profit will be earned from the trade without having to actively monitor a stock’s price action.
While holding a position trading stock position, it is a good idea to check the news flow associated with the stock(s) you are holding at least once per day to assess whether new developments associated with the stock require adjustments in the position trade or even closure of the position trade. For example, if your position trade is the anticipation of a new product launch, and a news story comes out that says the product launch has been delayed for three months, you may want to rethink the position trade.
An Example of Position Trading Strategies
Position trading can be done on both the long and short side of stock trading. Meaning, a position can be taken in a stock expecting a move higher (long) or a move lower (short).
A good illustration of both long and short position trading strategies is the annual Apple Computer (AAPL) Worldwide Developers Conference. Traders have identified a trading pattern associated with this annual Apple conference. Apple’s stock often trades higher in the days prior to this widely followed developers conference, as AAPL stock traders buy AAPL in anticipation of potential stock moving announcements from the conference. Buying a long position trade in AAPL a few weeks before the conference and selling the AAPL long position just before the conference can be profitable, if AAPL rises in anticipation of the developers conference. If the developers conference ends without any significant positive announcements, the price of AAPL usually drops, as short term traders close their long AAPL positions. The post-conference price drop provides a short position trading opportunity that involves selling AAPL short during the conference and covering the AAPL short position for a profit during the post-conference selloff.
Getting Comfortable With Position Trading Strategies
Usually, the stock market offers ample position trading opportunities to implement position trading strategies. Position trading from the long side works best during flat to bullish markets. Position trading from the long side can be difficult or impossible during sharp market selloffs, as the broad downward movement of stocks during a market selloff may negate any potential position trading gains from long positions. During market selloffs, also known as bear markets (when the selloff is prolonged and severe), position trading from the short side should be considered.
Most of the time required to be successful at position trading involves the time necessary to research stock market news and events to find suitable positions trading opportunities, and checking in daily for news updates once a position trade has been established. To get comfortable with position trading, it is recommended that novice position traders do paper trades inititally, instead of using real money to learn about position trading. A paper trade is simply writing on a piece of paper when you would buy or sell short, what stop loss you would set, and what limit price you would set to sell or buy to cover your position trade, without actually committing any money to the trade. See how these paper position trades work out, and take the time to thoroughly learn about position trading before putting any money at risk in the stock market.
Disclaimer: This article was not written by a financial professional or a registered financial advisor. This article is for informational purposes only, and is not intended to be solicitation or recommendation to purchase any securities mentioned herein. Please consult a registered financial advisor to ensure you understand the risks and rewards associated with buying and selling stocks and other financial products prior to trading.
Feel free to share any of your own position trading strategies in the comments section below.
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The Advantages and Disadvantages of Position Trading
© 2012 John Coviello
Mystocktobuy on February 12, 2013:
Very good article, but a position is taken when the probabilities are good to be successful. So, for this reason, I have just established a new website which deals with Nasdaq stock trading. It is FREE and highly professional. You are welcome inside it. Kind regards, Fredrick - http://www.mystocktobuy.com
chamilj from Sri Lanka on April 01, 2012:
Very useful stock trading tips. Thanks!