Position Trading

Position trading is a long-term trading strategy where an investor holds onto a security for an extended period of time, typically weeks, months, or even years. This strategy is based on fundamental analysis, and traders in this category are less concerned about short-term price fluctuations.

Understanding Position Trading

Characteristics of Position Trading

• Long-term Strategy: Position traders focus on long-term price movements and are less impacted by daily market volatility.
• Fundamental Analysis: They often use fundamental analysis to evaluate the potential of a security, looking at factors such as economic indicators, company earnings, and overall market conditions.
• Low Transaction Costs: Since trades are held for longer periods, position traders can incur lower transaction costs compared to day traders who execute multiple trades daily.
• Patience Required: Position trading requires a high degree of patience and discipline as traders must wait for their analysis to pay off over time.

Example of Position Trading

Consider an investor who decides to buy shares of a company, XYZ Corp., at a price of $50 per share, based on the belief that the company’s earnings will increase considerably over the next two years. The investor purchases 100 shares.

– Initial Investment Calculation:

• Price per share: $50
• Number of shares: 100
• Total Investment = Price per share × Number of shares = $50 × 100 = $5,000

After two years, the price of XYZ Corp. increases to $80 per share, and the investor decides to sell.

– Final Investment Calculation:

• Price per share at sale: $80
• Total sale proceeds = Price per share at sale × Number of shares = $80 × 100 = $8,000

– Profit Calculation:

• Profit = Total sale proceeds – Total investment = $8,000 – $5,000 = $3,000

Thus, the investor made a profit of $3,000 over the two-year period by holding the position in XYZ Corp.

Position trading suits investors who prefer to engage with the market less frequently and focus on the overall growth potential of their investments rather than trying to time short-term price movements.