Trading is one of the most vital skills to master when learning to invest in stocks, and more broadly, shares. Different methods can be used depending on which country you are trading in. For instance, you could use technical analysis or fundamental analysis, but different countries will require that you change your strategy accordingly. However, it might be advisable for beginning traders to stick with just investing using only the fundamentals instead of incorporating multiple strategies into their trade plans.
So before anything else, let’s first look at what position trading is precisely. Position trading gives investors exposure for a more extended period than day trading. They try to take advantage of short-term stock trends by buying low and selling high within one business day (which usually takes hours). Positions are sometimes referred to as the ‘base currency’ in Forex trading.
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What is a Position?
The term “position” is used because it is common practice to hold on to your investment until you make a certain amount of money, after which point you’ll use that capital to reinvest elsewhere. This means that while some traders might day trade or scalp, position trading takes longer time frames into account. It’s important to note that while holding positions for more extended periods typically increases the risk (due to price volatility), it gives investors more chances at actually turning a profit (compared with scalping, where most trades end up being losers). The main goal of position trading is, therefore, long-term growth.
How Do You Trade With Positions?
Decide on the Right Position Size
Before you set out to trade positions, it’s essential that you first define your risk tolerance. You can determine this by asking yourself a few questions: How much capital do I have? Do I have enough money to cover another mistake? Am I willing to lose more than what I am trading with now because the market moved against me?
In general, new traders should start with a small amount of their portfolio and slowly work their way up as they get better at reading the markets. You should never expose 100% of your investment when you are still inexperienced. By performing proper research on different stocks and setting stop-loss levels, you’ll be able to minimize losses and maximize gains on your trades.
Find the Right Stocks to Trade
The stock market is not easy for beginners, but some strategies can help you sift through options to find the best stocks to trade. Generally speaking, stocks with a high dividend yield will be less risky. They also tend to offer better options for position traders because they don’t fluctuate as much as other options (options are contracts that give investors the right, but not the obligation, to buy or sell shares at preset prices during specific periods). Ideally, this would include Vodafone (LON: VOD) and Unilever (LON: ULVR) options.
Set Stops Losses
No matter how good you think you are, there is always a chance that you might lose money on your position. This risk persists even if the options are in the money because options have an expiry date, meaning they expire after a certain amount of time. To protect yourself, it’s good practice to set stop losses at every level. Setting stops ensures that you don’t incur additional losses when things go wrong.
Understand The Company You Are Trading With
Another important consideration when trading options is learning to read financial statements for any company you are about to trade with. Remember, options trading isn’t like traditional stock trading, where you can cancel or adjust your order (you must exercise options before their expiration). This means that while every trader should know their exit strategy, options traders must also decide their entry point.
Choose the Right Type of Options to Trade
For beginners new to options trading, you can begin by trading options either in the money or slightly out of the money. These options will usually be cost less and thus allow you to test your skills as a trader without risking too much capital. However, if you think you have what it takes, there’s no harm in starting with options at higher prices (as long as you’ve done your research and understand how position trading works). Again, remember that options don’t last forever – always exercise them before they expire.
