Position Trading

My preferred trading style is the trading-cum-investment style known as position trading. It should be of particular interest to those coming from a traditional share dealing / investment background or those intending to operate via a spread betting account in addition to a traditional share dealing brokerage account.

Position Trading Explained

The aim when position trading is to hold a stock position (or more likely several stock positions) for as long as possible… but no longer. As the price of your chosen stock keeps rising, you keep holding, all the while raising your protective stop order in order to “lock-in” an increasing amount of profit. When the prevailing up-trend reverses – as eventually it will – the stop order closes your position (or positions) for whatever profits have accrued. While the position is in play for several weeks, months, or even years, any dividend credits that you receive will help to offset the ongoing financing charges.

Position Trading Example

The following chart illustrates a position trade that played out over the course of four months from November 2011 to April 2012. Having established a position in this stock at less than 15p-per-share, the position trader held on for as long as possible throughout the prevailing up-trend. He regularly revised his protective stop order upwards as indicated by the dotted line, until eventually the stop order triggered and closed the position automatically when the price trend reversed. This trader made a 16-point profit, which was more than his initial “risk” of 14 points and which therefore represents a 100%+ profit over four months. Because the spread betting company would have required a mere 20%-or-so “margin” deposit when opening the position, it could be argued that the return-on-investment was in fact several hundred percent! And it could have been much more if the price had risen further before the position stopped out.

Note that in an alternative scenario, the price could have fallen rather than risen shortly after the trade was opened. The trader would then have faced a choice between holding the losing position in the hope of an eventual recovery (usually not recommended) or closing the position for a small loss – perhaps automatically thanks to the protective stop order that we’ll discuss later.

Best of Both Worlds

You don’t actually have to choose between a shorter-term trading style like swing trading and a longer-term trading style like position trading, because it may be possible for you to have the best of both worlds. The following chart shows how there were a number of small “swing trading” profits to be made in this particular market by buying and selling weekly at the bottom and top (respectively) of the trading range; but that a bigger prize was on offer in the form of a subsequent position trader spanning several weeks.

The way to get the best of both worlds in this scenario would have been to open a double (e.g. £2-per-point, or some other multiple) spread bet at the bottom of the trading range, to close out £1-per-point at the top of the trading range (while leaving a residual £1-per-point with the potential to ride higher), and then repeat by re-doubling the bet (back to £2-per-point) at the bottom of the trading range. You would capture some profit on each of the swings, and would always have a residual position with the potential to run as an ongoing £1-per-point position trade if and when the price finally broke upwards out of the trading range.