Position trading is a highly misunderstood yet straightforward method of trading. Put simply, it is the buying and selling of stocks for future delivery at a fixed price. The only difference between position trading and day trading is that position trading does not consider intraday price fluctuations as far as profit maximization is concerned.
Simple isn’t necessarily easy, though. Though this trade has been around for centuries, most traders still confine themselves to patterns such as head and shoulders, wedges, ascending triangles, etc. These are often overused and misinterpreted by amateurs who don’t know how to use them to their advantage correctly.
This article will introduce two key techniques used in position trading, which, when used properly, can give traders a few simple tools at their disposal to make considerable profits in the Hong Kong stock market.
Know the market
The first step to position trading is to know the market that one wants to trade in. That means knowing the types of stocks offered, their price history, financials and economic indicators etc. This relates closely with technical analysis, where charts are studied for signs of future movements in the stock’s price. A trader needs to look at these charts to predict which direction the market will go during that day or even months ahead.
The Double Top and Double Bottom Pattern
The double top and bottom pattern work by purchasing a stock shortly after it has made a significant price drop from an all-time high or all-time low – i.e. a double bottom or double top, respectively. As we know, stocks often correct themselves after such large price movements and buying after such corrections can be very profitable because of the reduced risk component.
We also add additional value to this trade because we consider volume and price – that is, we buy a stock on the rise in volume when it is making a double bottom and vice versa. The logic behind this strategy is simple – if other traders are buying during the time of this price drop (the double top), then they are most likely wrong; conversely, if no other trader is buying at the time of its rise (double bottom), then chances are that it’s not going to go up much further.
This method has been around for centuries, but few people know how to implement it properly (and even fewer use both techniques together). Even fewer traders realize that Hong Kong stocks usually take two attempts before breaking out or breaking down. For example, there might be three or four touches on the lower lines before an uptrend breakout occurs.
Triple Tops and Bottoms
The triple top and bottom pattern work by selling after prices have peaked three times at progressively higher highs (triple top) or sold off to progressively lower lows (triple bottom). As with double tops and bottoms, the volume has to be taken into account. For example, if prices are making a triple bottom but volume does not increase on each successive low price point, then the chances are that it might break through its trend line support once again before finally breaking down.
Or, for example, if prices are making a triple top on an increased volume, then chances are that it will make one last attempt to break through resistance before finally giving up and breaking down.
To get into position trades using these techniques requires patience and concentration. It also requires discipline because prices can go against you for days or even weeks until they breakout or breakdown respectively. If you don’t have any other method than holding onto your trade throughout this period while hoping for the best, the chances are that you will lose money. However, if you can wait it out while getting a feel for support and resistance levels and the “mood” of the market over time, then this is one of the most lucrative techniques in Hong Kong stock trading. New traders interested in trading listed options are advised to use an experienced and reputable online broker from Saxo Bank.