In Malaysia, when you buy shares, it is frequent to be told, “you are going short on that stock”. What does this mean? In layman terms, it’s when you buy a share in the hope of selling it at a higher price in future. In other words, you are hoping for a capital gain. Unfortunately, there isn’t always a capital gain, and your initial purchase could end up being a loss instead. It’s where positions trading comes in.
When a trader opens a position, he does not own any of the stocks in the company. Still, he has an open financial contract with another party that obligates them to either pay or receive money upon settlement based on whether the market price is above or below their current trade price or strike price(navigate here for more info).
It’s known as a contract of difference. A trader would gain on opening a position on the right side (in the money) and lose when on the wrong side (out of the money).
Positions main objective
The main objective of position trading is to make profits by leveraging the inherent price movements in stocks without owning them. When you have correctly speculated stock movement, you could theoretically buy or sell at any time and still be profitable. The fund flow from your open positions will drive up the demand and thus the stock market price for that particular share.
When you take a long position, you are hoping for a price increase/rise over time, whereas taking a short position is predicated upon its decreasing/falling.
Positions trading is a derivatives trading strategy that allows investors to take advantage of stock price fluctuation. There are two main strategies to trade using positions:
Contrarian position trading
This method buys when everyone else has been bearish about the stock and sells when others have turned bullish. By doing so, you avoid buying at peak prices and selling at low prices while profiting from others’ losses.
It works because there will always be experts who can explain why your stock should go up or down, which would cause panic selling once the fundamentals prove them wrong. The fact is, most professional traders understand market dynamics, but not all of them know how to time their trades well enough for profits.
Price action position trading
This strategy emphasises technical analysis, studying market movement through charts and indicators using past price data to predict future prices. This method also allows traders to hold positions for short periods instead of days or weeks.
Call and put options
You can either buy call options (options to buy stocks at a fixed price within one year) or put options (options to sell stocks at a fixed price within one year). The call option works when the stock rises in value, and the put option gains when it falls. Instead of buying shares, you could open a position by selling borrowed shares first and then repurchasing them later once you have covered your loans with profits from your position(s). There are call and put options in Malaysia that last for three months (instead of 1 year).
It would help if you were prepared to accept that there will always be price fluctuations within any given time frame. Remember that choosing the wrong direction does not inevitably make your position wrong. Despite an incorrect prediction, if you believe in your entry point, put your profits first! Take profits quickly when you are ahead instead of waiting until you are behind before taking action.
Take profit is usually predetermined at a set percentage level or based on overall equity gain. At the same time, stop loss refers to setting up protective orders to cut losses by selling off positions once certain levels have been breached. The tricky part is determining properly where both take profit and stop loss should be placed. Just place them higher than you have lost and lower than your profits. It’s just common sense. Never keep a trade open unless it’s going in the direction you predicted.