A trading position is a strategic decision that involves buying, selling or holding a financial instrument, such as a stock or currency, with the expectation of profiting from future price movements.
Traders will select when to enter and exit positions based on research and in-depth analysis to maximise potential returns.
Taking a position
A trader will buy a stock if they believe it is undervalued with future potential to gain value, or the price has declined and there is potential for the price to recover.
If the trader already holds the stock in their portfolio, they can use a dip in price to purchase additional shares at a lower price. Known as averaging down, buying more shares at a lower price can reduce the average cost per share paid, which can improve potential profit margins if the price recovers.
Traders can also trade on margin using a contract for difference (CFD) to control a larger position with a smaller capital outlay or speculate on price movements without owning the underlying asset.
Traders will take a hold position in a share if they believe the overall trend will continue moving in their favour following a brief loss of momentum or consolidation. A swing or position trade will hold a position for days, weeks and even months to potentially profit from longer-term trends.
When a stock reaches a trader’s target price, or signs emerge regarding a potential reversal, traders will sell out of the portion to secure profits and reduce the risk of losses.
If a trader misses these signals and the stock price moves against a position by falling below its target level, it is important to sell a portion or all of the position to minimise losses.
Keep assessing positions
Due to the dynamic nature of financial markets, traders must continuously reassess their trading positions as market conditions change constantly due to various factors.
These influencing factors include economic indicators like GDP growth, inflation rates and employment figures, company-specific news that can impact stock prices, such as earnings reports, and geopolitical events, such as elections, trade wars, and natural disasters.
Continuously monitoring and reassessing your trading positions allows you to take profits when the stock reaches your target price, helping secure gains and avoid potential losses from future market reversals.
Interrogating consensus positions
This is particularly important and relevant when basing your trading decisions on a consensus position, which refers to the collective opinion or expectation of a group of market analysts, fund managers or other experts regarding a particular stock or market.
This consensus is often expressed in terms of buy, sell, or hold recommendations, and can significantly influence market sentiment and price movements.
For example, when a majority of analysts are bullish on a stock, it can generate positive market sentiment, leading to increased buying pressure and potential price appreciation. In contrast, a bearish consensus can lead to increased selling pressure and potential price declines.
Avoiding trading upsets
While leveraging consensus positions from analysts or institutional investors can help traders inform their strategies, it’s important to use them wisely and as a part of a broader approach to market and stock analysis.
In this regard, it is important to focus on recommendations from well-respected analysts and institutional investors. It is also worth considering the overall consensus, as well as the range of opinions, as a wide range of opinions may indicate uncertainty.
It is also vital to conduct your own analysis to determine the underlying fundamentals of the stock or currency market to confirm your position and identify potential entry and exit points to avoid trading upsets – instances when the majority of traders and investors experience losses due to market events.
Shifting copper sentiment
There were three major market events in 2024 that caused trading upsets, which highlight the risks associated with following consensus positions.
In the first example, the consensus position around the copper price suggested strong fundamentals would continue driving the price higher. Markets were talking up copper in April and May as increased demand from the green energy transition and the potential for an economic recovery in China boosted sentiment. Supply chain constraints and a weakening U.S. dollar made the commodity more attractive to foreign buyers.
However, three months later, the copper price had fallen roughly 20% from their May highs, as regional economic downturns, particularly in Asia, geopolitical tensions, and rising stockpiles disrupted an otherwise positive long-term outlook, leaving traders who took a long position with a loss.
Tech market correction
Following a strong bull run for tech stocks that began in October 2022 led by advances in artificial intelligence (AI), the consensus position was that these growth stocks would sustain their momentum.
However, tech stocks experienced a market correction in August, which is defined as a drop in value of 10% or more.
What markets initially labelled a stock rotation quickly shifted into correction territory after data showed U.S. hiring slowed markedly in July and the unemployment rate rose to the highest level in nearly three years, sparking concerns over economic growth.
As a result, stock markets experienced sharp declines in early August, with the tech-heavy NASDAQ Composite Index falling 13% from its 10 July high.
The unexpected rise in the yen
The 13% rise in the yen over three months after the Bank of Japan raised interest rates and intervened in the forex (FX) market also upset the market.
As the yen is used as a carry trade, which involves borrowing in a low-interest-rate currency and investing in a higher-yielding one like the U.S. dollar, the rise in interest rates and yen price caused filter-through effects that impacted multiple asset classes, including stocks and currencies.
Limiting losses
These market upsets highlighted the importance of setting stop-loss orders and regularly reviewing trades to minimise potential losses if markets or asset prices move against your position. This helps protect your capital and prevents significant drawdowns.
Ultimately, continuously reassessing your trading positions is essential for successful trading. Stay informed by keeping an eye on the latest market news and indicators, manage risk by adapting to changing market conditions with adjusted stop-loss and profit-taking levels, and maintain emotional discipline to improve your chances of achieving trading success.
