If you’ve always wondered what trading guru Warren Buffet used to become the richest man in the world (before he donated $ 50 billion to charity), you’ll find the answer here.
The American trader, also known as the “Oracle of Omaha” for his trading skills, is a strong supporter of the position trading strategy.
So, today we are going to talk about everything you need to know about position trading.
What Is Position Trading?
Among the long-term strategies, position trading should also be remembered.
What is it about, after all?
Position trading is the strategy of keeping open positions for weeks, months, or even years. The time frame in question depends on when they will become profitable. It allows the disposal and collection of the mail.
Before entering the market, however, the position trader must undergo a long period of settling. In this period of time, he will therefore have to thoroughly study the asset on which he intends to operate his investment.
If you intend to focus on a particular company’s action, it is, therefore, necessary to study in detail. Learn the company press releases, the financial statements. Try to understand if the launch of a new product capable of ensuring a competitive advantage is planned.
It is, therefore, a work in which fundamental analysis assumes great importance. However, it should be emphasized that operations of this kind involve considerable use of capital. It can be made possible by financial leverage.
At the same time, leverage must be used to ensure that you have enough capital. You should be able to maintain open positions even in the event of large price swings.
Position Trading Strategy: A Trend-Following Strategy
As you can easily understand, position trading can be considered the most classic case of trend following. In this case, in fact, all you have to do is follow the trend and take a position once this assumption has been confirmed.
The position, therefore, must be held as long as the trend lasts. In order to do this, the trader places two limits on his operations. Upon reaching the point, the position is closed and proceeds to collection:
- The first limit is represented by the establishment of a phase of uncertainty. If it is not taken for granted that the trend cannot resume force.
- The second limit is represented by the stop loss established by the same trader before opening the position. It is the level above which the investor decides not to risk or a convention aimed at limiting any losses.
Position Trading Strategy: Moving Averages
We found a stock with a good balance sheet, excellent company policy, and attractive to the market. Because it distributes good dividends but has been growing for a while, do we buy it?
Not in this case. The advice is, in fact, to buy stocks below 25% of the last maximum.
A stock already at the end of its trend is not attractive to apply a position trading strategy.
Therefore, it is necessary to look for excellent stocks at the beginning of a trend. You should be able to follow for months or years and thus earn large figures.
Position Trading vs. Swing Trading
Among all the strategies, position and swing trading are the most popular ones. They have one fundamental difference: timeframe.
Let’s see the differences in this following comparative table:
|1. The operations can last for years; this means that the capital is blocked for a long time.||1. In this case, operations do not last longer than a few months.|
|2. It is not for everyone; large capital is needed to keep positions open for a long time.||2. One can operate this trading with a fairly lower capital; thus, many can opt for this.|
|3. It is a strategy that can lead to significant gains.||3. Swing trading eyes for smaller gains.|
|4. Less stress for the trader; such a position does not need to be checked every day.||4. You have to keep an eye on every day, thus more stress.|
|5. More time for other operations or other jobs, a position trading strategy requires time only in the analysis phase of the stock.||5. Continuous involvement can build up emotional attachment.|
Advantages and Disadvantages of Position Trading
Like any strategy of this kind, Position trading has advantages and disadvantages to be examined in advance.
- Among the most obvious advantages is that of not being forced to follow financial markets moment by moment.
- Furthermore, it is a strategy characterized by prudence. It, therefore, does not need to operate in conditions that can generate great stress.
- Position trading involves the investment of substantial resources, not just economic ones.
- Position trading can last for years and therefore involves a strong investment in terms of time.
- Among the disadvantages, the first is precisely that relating to the fact that it is necessary to invest strong resources. However, immobilizing them on an operation that can last even years. Suffice it to say that Philip A. Fisher, considered Warren Buffett’s teacher, entered long on Motorola in 1955 and only came out on his death certificate in 2004.
- Furthermore, as we have mentioned, to better prepare for market entry, it is necessary to subject to in-depth analysis. It would be best if you studied the macroeconomic conditions in which its price is immersed. It follows that to do position trading, it is necessary to be an expert trader.
- Another disadvantage consists in the fact that the return from operations of this kind is quite limited. Compared to that generated by other strategies, especially if this factor is added to the first factor, it can discourage the most impulsive traders.
- Finally, the most important of all, namely the investment, and you need to manage it in time. If the trader goes against the trend, he will * lose his investment. At the same time, he will have nullified the long study phase that preceded him.
Finishing Words: Position Trading
Among the long-term strategies, position trading is one of the most popular, but also complicated. It presupposes a long period of study and skills that are typical of fundamental analysis.
It is a classic trend following strategy. The position trader must have a high level of mental strength to succumb to the tension. It also presupposes the use of significant capital, unless financial leverage is used. It is, therefore, a strategy absolutely forbidden to novice traders.