Positions trading, also known as position trading or simply ‘positioning’, is an investment technique that involves buying and selling financial products to benefit from either small price changes (buying for a price rise) or significant price changes (selling for a fall in price).
Position trading is commonly referred to as “going long”. When someone thinks about buying company shares, they take a ‘long’ position. This means that if their prediction for the company is correct, the share value will go up and make their money. On the other hand, if they predict wrong and their hunch is incorrect, the share price falls, and their investment becomes worthless.
How does position trading work in the UK?
A position trader does not attempt to make money on every transaction. Instead, they aim to make smaller profits more frequently than larger ones, which helps reduce market exposure and risk. This strategy is often used alongside other techniques, such as swing trading, which attempts longer-term trends. Still, it reduces exposure over traditional day trading while also allowing you to take advantage of short-term movements.
Position trading is usually used in commodities and financial markets but can be applied to other sectors. Position traders generally work with big institutions rather than individuals, often placing large trades that affect the market. In this way, they can take advantage of price movements without predicting them before they happen.
What are short selling and long selling?
What does one do when thinking that a share will decline? Instead of just watching it fall, why not try short-selling? This way, your losses are limited, and you can short-sell the company when it peaks or has somewhat of a price decline. When short selling, you can sell something you don’t own and then cover your position after repurchasing it cheaper, making money from the difference.
When you’re going long on something, you predict its price will increase because demand is high. Supply is low, so when prices decline, the opposite would happen if someone were going against this idea by short-selling, where they believe the opposite is true.
Risks of positions trading
The position trader is at risk of not clearing their ‘open’ position unless they manage it very carefully; it could turn into a ‘margin call’ if they don’t work it correctly. This happens when insufficient funds are available in an account or accounts to cover what has already been bought or sold (known as entering into ‘finance’) along with any costs associated with continuing the trade. Managing an open position according to its finances means deciding whether to close the position, incur a loss or keep it open and risk the possibility of bankruptcy.
Steps to trade in positions in the UK
To trade in positions, one must be an accredited investor, which means having a net worth of at least £1.5 million or having income over £70,000 per year for the past two years. In addition, one also has to fill out a risk acknowledgment form that points out all the risks of position trading.
Bottom Line
Trading positions takes a lot of time, effort, and money, so one should only attempt it if they have considerable market knowledge and can handle all the risks of position trading. When going long or short selling, remember there’s a certain margin needed for safety when trading positions, so always research beforehand to get an idea of how much you would need for safety before making any trades. For more information on classes and trading, read about the great offers from reputable online brokers Saxo Bank.
