What’s the optimal period of holding a position? The answer to this question is very multifaceted and at the same time is simple and concise: the position should be held until the investor considers it promising. However, in order to take advantage of such a simple solution, it is necessary even before entering a trade to form a clear vision of what kind of instrument behavior will correspond to holding a deal, and which – to its immediate closure.
The importance of having a trading plan before the transaction is noted by almost all stock market gurus. As part of the preparation of such a plan, it is worth asking yourself the questions: “Can I focus on time? If the transaction is not realized in N time, does this reduce the likelihood of success? And if the potential is realized, but earlier than expected, is it worth holding the position further?”
Depending on the trade approach, the time factor may manifest itself in different ways. We offer the following vision of this moment for various trading styles.
Scalping
Traditional scalping involves short impulse trades with a holding period of no more than a few minutes. Transactions are opened by signals of a short-term imbalance in the market and after some time are closed regardless of the result. With this approach long-term retention of a position is ineffective, it raises the risks of increased loss.
Intraday Trading
It is often also called scalping, although this is still a slightly different approach. The main rule is not to transfer transactions through the night in order to be able to use the maximum leverage while controlling risks. Usually the position is held no more than 2-3 hours, although there can be positions that are held for the whole day.
As a rule, intraday traders try to formalize as much as possible the grounds for holding a position so if certain conditions are absent, they can quickly take profits (losses) that the market has given.
Before entering the deal, depending on the specific pattern and average volatility of the instrument, the trader estimates what profit can be expected in this transaction. The level of acceptable risk is also immediately assessed. This trading plan becomes a guideline for the subsequent management of the transaction.
The price graphs and the situation in the stock exchange are usually used as a ground for analysis. The intensity of purchases / sales in the tape of transactions, the presence / absence of large orders in the traders account, the presence of a trend on lower timeframes (usually 1 and 5 minutes), the nearest technical levels and their breakthroughs, external background, the overall market dynamics, dynamics of currency and raw materials can also be taken in consideration.
The quality of the assessment of the potential of the transaction by the trader grows with experience. Depending on the volatility, sentiment and other factors, the plan of action in a particular transaction may vary significantly.
If the trader begins to doubt his position in the course of the movement and cannot clearly decide whether to hold the position until the goal, he can fix a part of the profits and reduce the risks.
In general, the most important rule is “cut losses quickly and let profits grow”. Therefore, it is better to close negative trades within a day right away, but it is recommended not to hurry with the closing of a profitable trade.
Swing trading
The term implies holding the position from one to several days. To search for signals, traders give preference to technical analysis, but, unlike intraday trading, more attention is paid to background information and published news.
With this style of trading, closing a deal looks quite acceptable simply because, if there are grounds, the tool does not go in the right direction for too long. For example, a technical signal, which used to give good results almost immediately, this time a couple of days has remained unaddressed.
Regular observations and statistics help to form the correct expectations for the implementation of the transaction during swing trading. If you bet on the closing of the gap, then analyze on the history of how long gaps of this size were closed in comparable market conditions. If you buy panic sales in the hope of recovery, then carefully examine the reason for sales and find similar situations in the past.
You should not be too strict with yourself. Often, traders are mistaken and leave too early, or vice versa, they drag the deal, as a result of which they lose part of their profits. This is normal. It is worth considering this only as a reason to carefully review your trading plan in the next such transaction.
Medium term trading
Perhaps the widest niche in trading. A position that is open for two or three weeks, or for several months is called medium term. Most of the problems and issues related to the time of holding a position arise precisely here.
The relatively long cycle of the transaction makes it difficult to form a detailed trading plan that could take into account all possible scenarios for the development of the movement. In addition, it is very difficult to estimate the speed of accounting in the quotes of fundamental factors, since each situation is different in its own way.
Additional problems lie in the sphere of trading psychology. Some speculators neglect to draw up a plan in principle and open a deal on emotions, keeping in mind only a positive scenario and forgetting about alternatives.
In such a situation, as soon as something starts to go not according to plan, the trader faces uncertainty. Without a ready action plan, it is very difficult to make an informed decision, especially if the transaction is in the red. Psychological experiments, presented in the book by Nobel laureate of D. Kahneman “Think slowly ... Decide quickly,” say that in a situation of choosing between guaranteed loss and probable exit to zero, a person would rather prefer the latter. The risks of increasing the loss due to the preservation of the position of the psyche are usually ignored.
This way a trader acquires “frozen” unprofitable positions in his portfolio. If these are shares of good companies that were bought without a leverage for a reasonable amount at more or less adequate prices, then in principle such positions can be reclassified from speculative to investment and left for a longer period.
But if these are positions on third-tier stocks with dim prospects, futures or short positions, then time usually does not play on the side of the investor. If you do not understand what is happening with the instrument and what to expect from it, it is better to start gradually closing the problematic position, using as much as possible more favorable prices.
Sometimes a different situation happens – the position is growing and has already reached the goal, but still looks promising. Or does not look, but the trader begins to be greedy and looking for a reason to wait again. Sometimes it is really difficult to distinguish one from the other. Then the question also arises, is it worth waiting for further movement and, if so, how much?
The following solution can be proposed: most of the position (2/3, 3/4, 4/5 or others) should be closed and the rest held, but a clear exit plan with a profit or loss reduction should be formed.
If growth prospects look very attractive, and the time frame of the trader is not constrained, then you can think about re-qualifying the position from speculative to investment.
Long-term trading – investing
Investment is described as the purchase of shares of promising companies for a period of more than 1 year. The main instrument of the investor is a thorough and accurate fundamental analysis of the issuer and the market as a whole.
With this approach, the position holding period is limited only by the investor’s personal plans for the use of funds. In general, we can recommend holding shares until an asset promising higher returns appears on the market or until the fundamental idea of the instrument is relevant, and the risk on the portfolio remains at an acceptable level for the investor.
You can compare the investment with driving in heavy traffic. The average flow rate is the average yield of the entire market. Periodically, some rows travel faster than the average, and some more slowly. The choice of a promising stock is an attempt to integrate into the row where cars travel faster than others. The path traveled is capital growth. Cashing funds can be compared to parking on the sidelines. Transfer to state issued or corporate bonds – commuting with public transport.
With such a view, it becomes obvious that once again shuffling stocks in a briefcase — jumping between the rows on the road — can be ineffective and even harmful. It makes sense for an investor to change stocks in a portfolio only when the potential yield of new securities looks higher.
If more and more attractive papers are already present in your portfolio and you do not want to expand their share, then you can rely on the relevance of the investment idea, because of which you bought this paper. As long as the driver remains in force, the paper should be kept.
But if the driver has already exhausted itself or new circumstances have appeared that can block the entire positive effect, then in order to reduce risks, it makes sense to think about selling paper and placing free funds in other stocks or temporarily in bonds. It is always worth remembering that, like on the road, in the event of an “accident” you can lose more than you can win from a “hard drive”.
Conclusion
In order to more correctly determine the period of holding a position, first of all, decide on your personal plans. How soon will you need the money invested and what trading style do you plan to stick to? Depending on this, you need to select specific tools.
Inside the day, time in a position is not important – technical signals are much more important, which will tell you about the moment of exit. The only limitation is that by the end of the auction all transactions must be closed. This will allow you to use the maximum leverage for free and get a high return on the capital used. It is better not to hold unprofitable positions – successful traders usually fix losses very quickly.
If you stick to a more relaxed speculative trading on the horizon from several days to several months, then use statistics and historical data to form time expectations. At the same time, do not forget that in reality the situation may develop longer than planned. Therefore, it is always necessary to have on hand a trading plan in which the conditions for holding or closing a position until reaching the goal will be marked.
In the case of long-term investments, it is recommended to hold the stock until a more favorable option for investments appears on the market, or until the risk on the portfolio remains at an acceptable level.
