The Seven Pillars of Position Trading
Sep 28, 2011 at 1:11 pm in Position Trading by
Swashbuckling day traders get a lot of press, as perhaps do short term swing traders. You hear less about position traders, falling as they do in the not-so-sexy space between trading and investing.
Having tried my hand at various trading and investment styles at the “Investment School of Hard Knocks” (and sometimes still doing so) I have settled mainly on position trading as the style that suites me best and allows me to sleep most soundly at night. When it works, it works really well, and when it fails, it doesn’t fail badly, and that’s pretty much all that any of us can hope for.
What is Position Trading?
Definitions I have seen for position trading range from ‘similar to swing trading, but with a longer time horizon’, through ‘a style of trading characterised by holding an open position for an extended period of time’, to ‘the act or practice of buying and holding’.
To those definitions I would add ‘Trading with the intention of holding for as long as possible… but no longer!’ and I would extend the term ‘position’ to not only reflect holding a position in a single stock, but also to reflect the fact that my portfolio includes many individual stock holdings that jostle for ‘position’ as some stocks drop out (by stopping out) and others attract additional funds over time (through pyramiding).
The Seven Pillars of Position Trading
My implementation of the position trading approach is all about keeping it simple and (above all) applying good money management techniques, on the basis that if you look after the downside then the upside will take care of itself.
In the short term it’s about buying like a trader, with the possibility of stopping out quickly for a small loss. In the longer term it is about holding like an investor — theoretically forever — as long as the price keeps going up and the dividends keep rolling in. But no longer!
More formally, my interpretation of this trading style is based on the following principles, which I regard as the seven pillars of position trading:
- Diversification, so as to spread risk across positions and over time.
- Stop Orders, to cut losses and lock in profits.
- Position Sizing, so as to not risk too much money too soon.
- Pyramiding of more funds into profitable positions.
- Leverage, to amplify gains through margined spread betting.
- Stock Picking, to identify the best prospects at the right time.
- Dividends, to fund future pyramiding and to offset financing charges.
Subsets of these seven pillars will be relevant to other trading and investment styles, so they’re not limited to position trading, and in the next seven installments I’ll look at each one in turn — so stay tuned for the first installment next week!
Tony Loton is a private trader, and author of the book ‘Position Trading’ published by LOTONtech.