Let The Profits Ride: Methods of Long Term Trading
With the market’s recent volatility, it can be easy to lose perspective and focus too much on day-to-day price swings. Due to the volatility, there is certainly ample opportunity for making short-term plays, but closing out positions prematurely can become costly over the long run.
Long term or position traders are not looking to get in and then back out of a position in the same day. They can hold a position anywhere from several days to several months. Position traders tend to be active traders that have some time to devote to their investments each day, but are not looking to analyze the hourly movements of each stock in their portfolio. They are looking to track notable changes in their investment holdings over time.
Position traders use information such as financial reports, industry analysis and SEC filings to make their investment decisions. The Internet has also made it easier for position traders to listen to archived conference calls or management presentations at their convenience. From a technical standpoint, they might utilize price charts and technical indicators such as channels and moving averages.
One example of a strategy that a position trader might use is taking a long position in a stock that has just broken above its Donchian channel from the previous 20 trading days. Donchian channels were named after the commodities and futures trader Richard Donchian. The channels essentially set out price levels for traders to use as guidance in making buy and sell decisions. The upper band of the channel is plotted using the highest high from the previous 20 trading sessions. The lower band is plotted using the lowest low from the previous 20 trading sessions. When a stock moves above its 20-day high, this movement is often viewed as a signal to buy. When it moves below its 20-day low, this fluctuation would be a sign to sell.
Another example of a strategy that a position trader might use is buying or selling a stock upon a moving average crossover. To generate buy and sell signals for this strategy, two exponential moving averages (EMA) are calculated. For instance, a 30-day EMA might be calculated along with a 100-day EMA. Using a 30/100 EMA strategy, the trader waits for the 30-day EMA line to cross above the 100-EMA to buy. Should the 30-day EMA line cross back below the 100-day EMA line, this move would be interpreted as a bearish sign.
An example of this strategy in practice can easily be depicted by looking at a recent chart of the PowerShares QQQ Trust ETF
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PowerRating). We can see that the 30-day EMA crossed below the 100-day EMA on January 11. Position traders who were holding shares of the QQQQ at this point would be looking to sell.
However, we can see that over the past few days the two moving averages have grown closer, with the 30-day EMA crossing over the 100-day EMA on May 5th. At this point, position traders who had money on the sidelines would be looking to buy shares.
In addition to utilizing the aforementioned tools and strategies, position traders might also decide to employ the use of options or LEAPS. Options and LEAPS are beneficial to position traders on multiple fronts. Call options and LEAPS call options are advantageous in that they allow the trader to gain exposure to the price movement of a specific security without the obligation of directly owning the underlying asset. Put options and LEAPS put options can be used by the position trader for added protection against market downswings.
The advantages of position trading are that the position trader does not need to do as much homework as a day trader and the position trader also does not need to monitor the market’s fluctuations on an hour-by-hour basis.
There are disadvantages to position trading. One of the biggest drawbacks is overnight exposure. By holding a stock for several days to several months, position traders are subject to fluctuations occurring as the result of news or events that occur in pre-market and post-market hours. Another disadvantage to position trading is that such a strategy may cause the investor to forgo time-sensitive, intraday opportunities that arise throughout the course of a trading session. The nature of this style might also lead the position trader to be less nimble in reacting to market trends than would a day trader.
Is position trading right for you? Traders who have a good amount of time and resources at their disposal, may prefer the action and speed of the day-trading game – or even aggressive swing trading. But for most everyday investors that are willing to putting in a reasonable amount of time into tracking their holdings, the position trading approach might be the way to go.
For more trading strategies, go to TradingMarkets.com/reports.
Billy Fisher is a CPA and a freelance investment writer whose work has appeared in Investor’s Business Daily, TheStreet.com and SmallCapInvestor.com. He holds a master’s degree in accounting from the University of Notre Dame and a bachelor’s degree in accounting from Canisius College.