Most people trade stocks based on the direction that they believe prices will move, whether that is up or down. This is called a “directional” strategy. The goal with these strategies is to buy low and sell high.
The second type of trading strategy, which is much less popular than directional trading, is known as position trading. You can learn more about positions trading by visiting Saxo Bank online.
When using directional strategies, traders are attempting to determine where the price of an asset will go over the near future. If they are wrong about this prediction, they can potentially lose money very quickly because they have no control over how long it takes for their prediction to become correct. This makes directional trading risky because if you are wrong then you could potentially expose yourself to a large loss in a very short period.
What is the goal in position trading?
In position trading, the goal is to trade in the direction of the market’s momentum rather than predict where it will go next. The job is letting the price action tell you which way it wants to move and then getting out of the way. A trader simply needs to watch for when prices start moving in one direction, determine whether they are moving too quickly, and then get out if that happens. Then all you must do is let them come back toward your buying price before getting back into the profitable position that you just got rid of earlier.
For example, if I think that Apple Inc. (AAPL) stock has reached the top of its current rally, you can simply start watching intraday price action for signs that it is slowing down. If this happens you will then put in a limit order to sell the stock at its current market price if it drops back toward the level where you originally bought it at. Once your sell order gets filled, all you have to do is wait for Apple Inc.’s share prices to tick back up again before entering another buy order on the same stock or an alternative one.
Position trading allows you to follow the momentum of the market rather than predict what direction it will go next, which makes it much less risky because you are unlikely to lose money as quickly if you are wrong about your prediction. This strategy is also much less likely to lead to you falling into the same “trap” that many market participants tend to fall into which is buying at or near a peak and selling at or near a bottom.
How to start trading?
To start trading with position strategies, however, you will probably need to open a margin account as well as a standard stock brokerage account because they allow traders to borrow money from their brokerages to put on larger positions. This means that if you have $10,000 in your brokerage account and borrow another $10,000 from the brokerage itself then you now have $20,000 worth of buying power which allows you to place larger trades. This is important for position traders because it gives them the power needed to take a long or short position on a stock that they otherwise would not have been able to afford, which in turn increases the size of their potential profits.
Let’s finish
Of course, if you are making larger trades then you will be responsible for paying interest on the money that you borrow from your brokerage, so it is important to understand how margin interest rates work before borrowing any money. If you know what you are getting into then this can help traders because there are times when these sorts of loans can become almost like free money.
