Learning how to position trade stocks (or other financial instruments) is another popular trading style that is more for longer-term traders who have a proactive mindset.
Because of the longer term nature of position trading, it doesn’t require all that much time to manage your trading positions and can easily be done even if you already have a full-time job.
Trading positions can be held anywhere from several weeks to possibly up to years – if the trade keeps on moving favorably according to your outlook.
Position traders are more focused on when to enter a trade (or multiple points of entry if position building) and managing trading risk rather than on setting defined profit targets and having tight stop loss limits which can possibly get them out of a trade too soon. They are willing to sit through minor pullbacks and sideways price consolidations in the hopes of capturing bigger price moves to achieve larger trading gains.
Usually more than one type of research method is used to find worthwhile trading prospects for position trading. For instance, you can use both technical analysis and fundamental analysis to help find great trading opportunities.
By adding fundamental analysis to your research in searching for trading prospects, you can find companies that are financially strong, are leaders in their industries, and that have something superior to offer to help generate increasing revenues and earnings. This can all have a significant impact in fueling the stock price to go much higher.
Focusing On The Bigger Picture
Position traders are usually more interested in the bigger picture and don’t get overly bothered by the smaller things like short-term price volatility. They are willing to give the trade more time to play out to reach its full trading potential.
Also, position traders may try to gauge the current and future trading climate by assessing major influences that can have a big impact on market conditions such as economic, political and global events.
Position traders may be interested in getting a better understanding for such things as the following:
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The State of the Economy
What is the current (or even projected future) state of the economy? Is unemployment high (or low) relative to historical measures? Is the economy in a recession? What is the level of interest rates compared to the past – are they expected to rise or fall in the future? Is inflation out of control or is it stable? How indebted is the federal government? What is the growth (or contraction) of new jobs being created? Is the government providing enormous amounts of financial support to stimulate the economy?
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Catalyst
Try to find a catalyst (a big event or announcement, etc.) that will move the price of a stock significantly higher or lower. Do research and try to find something about a company that will have a big impact on its stock price. Things like FDA approval of new medicines, hot new products or services being released, or even corporate corruption like fraud and accounting irregularities can all have a big impact on the price of a stock.
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Picking Winning Companies
What attracts and allures you to be excited about a particular company? Do they have cutting edge technologies, superior innovations, or are they getting ready to launch something spectacular that is projected to revolutionize the industry?
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The Dominant Trend
Try to gauge the dominant trend by looking at price charts. Use higher time frames to help identify the dominant trend and lower time frames to get a sense of when to enter a trading position.
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Fundamental Analysis
Use fundamental analysis to research companies that are fundamentally and financially strong. Things like healthy financial statements, talented management teams with superior leadership skills, products and services in high demand, and strategic business plans can all help to maintain stock value and, even more importantly, propel it to go much higher.
Watch for companies that are gaining market share dominance and experiencing sky rocketing revenues and earnings. This can also have a substantial impact on the price of a stock to go much higher as well.
(note: the “CANSLIM” formula created by William O’Neil, founder of Investor’s Business Daily, is a great way to find winning trading opportunities for position trading that uses fundamental analysis. There are even stock screeners available to scan for stocks based on the “CANSLIM” Formula).
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Market Cycles and Seasonality
Some companies and industries experience seasonal peaks and valleys over the course of a year (or operating business cycle).
The supply and demand for products and services of such companies may be substantially higher or lower during certain times of the year (or operating business cycle).
This imbalance between supply and demand can play a major role in the ability to generate and sustain revenues and earnings (or lack thereof) which could have a dramatic impact on the price of the underlying stock. This can lead to large gyrations of up and down price patterns over extended periods of time which can then be analyzed and monitored for position trading opportunities.
Even mother nature can play a big part on stock prices or on other types of financial instruments – from droughts to prolonged and severe winter weather conditions causing major nature and financial damage.
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Blending Technical Analysis and Fundamental Analysis
Use the best of both worlds by finding fundamentally strong companies and wait to trade them when they are aligned with your favorite technical indicators. This will give you a winning combination in finding great position trading opportunities.
Position Trading On Autopilot
With position trading you can manage your trades by having your computer automatically execute trades for you by using different types of stock trading orders. This will be like having your own “personal trading assistant” looking out for your own best interest.
Some of the things that your computer can automatically do for you along with using advanced trading orders is:
- Enter Trades
- Exit Trades
- Manage Trading Risk
- Lock in Profits
You can also build larger positions over time by scaling into them with setting multiple trading orders that are strategically set at different price points to be executed automatically.
(To learn more about how to do this click on How to Trade on Autopilot and Different Types of Stock Orders).
Risk Management
Due to the expectations of holding trading positions for longer periods of time when position trading, the rules of risk management are usually different compared to other trading styles such as day trading and swing trading.
Because position traders are more interested in attaining larger price moves in the hopes of earning bigger profits, they are willing to give the trade more room to move about. As a result, the rules of risk management are somewhat more relaxed by setting wider stop losses to accommodate any short-term adverse price volatility when having an open trading position.
