Position Trading: Everything You Need To Know

Many traders look for strategies that can take all the hassle away. Well, no strategy is 100% accurate, but many pros consider long-term strategies more effective.

The longest type of trading is position trading. Position traders keep their positions open for months or even years at a time.

They get into the trade and then forget about it (not literally). So rather than scalping for a few pips, the goal is to remain composed and wait for larger returns.

In this guide, we'll explain what position trading is, how it works, and some of the position trading strategies you can apply.

What is position trading?

It is a long-term trading strategy that aims to reap from market movements. Position trading is the closest thing to a real "buy and hold" investing strategy because it doesn't require actively.

Position traders select equities that they can hold for weeks, months, or even years and buy them. The distinction between position trading and investing is that, although investors want to hold an asset eternally, position traders will evaluate their trades regularly and sell if the overall momentum looks to have slowed.

Position traders, unlike day traders and scalpers, are unconcerned with little negative corrections along the road, but they do keep a close eye on the general direction of their assets.

How does position trading work?

The sort of trading that most closely resembles investing is position trading. This type of trading is just for the most patient traders, and it requires a thorough grasp of the fundamentals.

Fundamentals determine long-term market trends. Thus it's important to grasp how economic data influences the markets.

While fundamental analysis is more important to position traders than technical analysis, technical analysis is still employed.

Position traders analyze possible trends using both fundamental and technical analysis.

Your stop losses will be quite substantial due to the long holding duration of your trades. Position trading also needs a thick skin because your transactions will almost certainly go against you at some time.

You may face large fluctuations, and to be calm, you must be prepared and have full confidence in your analysis.

Position trading strategies and techniques

Position trading doesn't require sitting in front of your screens all day. So, you must come up with the best trading strategies and techniques. Here are some of the position trading strategies you can apply:

Short-term and long-term Moving Average

The 50-day moving average and 200-day moving average indicators are important technical indicators for position traders. It is because these moving averages depict major long-term patterns.

When the 50-day MA and the 200-day MA cross, it indicates the possibility of a new long-term trend.

The Death Cross appears when the 50-day MA crosses below the 200-day MA. The Golden Cross, on the flip side, occurs when the 50-day MA crosses over the 200-day MA.

Position traders use these longer-term MAs as chart indicators.

Support and resistance

Support and resistance levels can help traders decide whether to enter or exit a position by indicating where the price is heading.

Support is a price level that has never been broken in the past. These "historic" levels of support might last for years.

On the other hand, a resistance level is a price level that has historically proven difficult to overcome. These past levels of resistance might last for years.

Position traders might close out their positions before unrealized profits start to disappear if they expect long-term resistance to persist.

On the other hand, if they believe a long-term trend will hold and continue upward at this point, they may also take long positions near historic support levels.

Traders must analyze chart patterns to use this strategy. When looking to find support and resistance levels on a chart, position traders consider three variables.

When it comes to navigating support and resistance, the historical price is the most dependable source. Previous support and resistance levels are easy to notice during major up or down times in a market.

Previous levels of support and resistance are also used to predict future levels. For example, once a resistance level has been broken, it is not uncommon to become a future support level.

Moving averages and Fibonacci retracement are technical indicators that give dynamic support and resistance levels that move with the market.

Breakout Trading

When the price goes outside of predetermined support or resistance levels, this is known as a breakout.

Position traders might benefit from trading breakouts since they can signify the start of a new trend.

This strategy is used by breakout traders who want to get in on the ground floor.

Trading breakouts involve opening a long trade once the price breaks above resistance or a short position after the price breaks below support.

To trade breakouts successfully, you must be familiar with spotting times of support and resistance.

Pullback Trading

A pullback is a brief dip or reversal in the current trend.

When there is a temporary market dip in a longer-term trend, this method is adopted.

Traders who trade pullbacks are looking to profit from market pauses.

The concept behind the pullback approach is as follows:

You buy low and sell high before the market drops and then buy again at the new bottom for long trades.

Conversely, you sell high and buy low before a market momentarily rebounds and then sell at the new high for short trades.

If executed successfully, you can not only profit from a long-term trend but also can limit your losses.

If done correctly, a trader can earn from a long-term trend while avoiding potential market losses by selling high and buying low for long trades.

For short trades, you are buying low and selling high.

Retracement indicators, such as the Fibonacci retracement, can be used to help detect potential pullbacks.

Best indicators for position trading

Technical indicators often do not play a big part in discovering trade opportunities because of the long-term approach that position traders use to identify trades.

Rather, traders are more concerned with economic data such as inflation, unemployment rates, and other long-term variables that impact currency prices.

On the other hand, indicators can still be utilized to assess trading possibilities, especially when considering historical data.

Before we get into position trading strategies, it's important to mention technical indicators for trading.

Here are the best indicators for position trading

Moving Averages

A simple technical analysis tool is the moving average. Moving averages are commonly used to assess an asset's trend direction and its support/resistance levels. Since it depends on previous prices, MA is a trend-following or lagging indicator.

It comes in two varieties: SMA (Simple Moving Average) and EMA (Exponential Moving Average) (Exponential Moving Average)

MACD

Convergence of Moving Averages Divergence is the difference between the 12-day and 26-day exponential moving averages (EMAs). It's a straightforward visual aid that can assist you in identifying trading possibilities.

A buying opportunity occurs when the MACD crosses the signal line on a histogram, and a selling opportunity appears when the MACD crosses the signal line on a histogram.

Bollinger Bands

These bands are two standard deviations above and below the SMA and are based on the simple moving average.

The SMA is typically a 20-day average, but traders might change this to allow for more historical data when considering a long-term trade.

What instruments do position traders typically trade?

Position traders can try their hands on several markets. But, first, let's take a look at some of the positions of the instrument traders' trade:

Forex pairs

Because forex markets are prone to significant medium-term movements, they offer frequent options for position trading. The other reason is that the forex market is super dynamic, with trading possibilities available 24 hours a day, continuously reacting to economic data and world events.

Forex traders, on the whole, prefer shorter periods, such as day trading or swing trading. The overnight swap cost that forex traders must pay for maintaining a position overnight is one of the reasons behind this.

Stocks

Most position traders will likely lean towards equities as their default market. Retail investors often expect to see a return on their investment within a year but do not have the time to follow markets all day.

Stocks are excellent candidates for theme investment. For example, a predicted shift in government policy might boost a company's profitability over the following six to twelve months.

Commodities

The supply and demand for commodities determine the price of the commodity. There will be times when supply and demand are relatively stable, but something unexpected happens, such as weather in the case of agricultural commodities or a mining strike in the case of metals. It results in a long-term trend, which is beneficial for position trading.

Index CFDs

Because indices are made up of equities, their price movement is steadier and responds to macro concerns rather than micro issues.

For example, you may see that the market is in a bull market and desire to participate for the next few months, or you may believe that a bear market is on the horizon and wish to short the stock index. Both are viable options for using index CFDs for position trading or hedging.

Ok, let's move to how position trading is different than other forms of trading.

Position trading vs. Day trading

Day trading is a conventional trading strategy in which you purchase and sell a currency pair over a trading day to profit from modest price fluctuations. It's a type of short-term trading similar to scalping, but unlike scalping, you normally only take one trade each day and close it out at the end of the day.

Day traders like picking a side at the start of the day, working on their bias, and then profiting or losing at the end of the day.

Day traders have adequate time during the day to evaluate, execute, and monitor their trades.

Carrying overnight positions is a part of positional trading. Positional trading involves keeping a position open for a lengthy period.

Position trading vs. Swing trading

Traders utilize swing trading as a medium-term trading method to profit from market volatility.

It's a trading strategy that requires patience to hold deals for multiple days at a time. Swing trading crosses the two most frequent trading styles: day trading and position trading.

Swing traders identify prospective trends and hold on to them for a long time, anything from two days too many weeks.

It's ideal for individuals who can't watch their charts during the day but have a few hours to dedicate to market analysis.

Swing trading is appropriate for people who work full-time or are enrolled in school but have sufficient spare time to keep up with the broader economic situation.

Position trading vs. Investing

Position traders and investors can be distinguished because they hold their positions for even longer durations than position traders.

Investments are frequently kept for years, if not decades, to take advantage of benefits such as interest, dividends, and stock splits.

While markets will undoubtedly fluctuate, investors will ride out downtrends hoping that prices will ultimately rise and any losses will be recouped.

Market fundamentals, such as price-to-earnings ratios and management projections, are often more important to investors.

Pro tips for position traders

Position trading requires digging deeper into market analysis. So, here are some of the tips you can use for position trading.

Consider using low leverage

Position trading is typically considered a capital-intensive trading method since prices tend to vary in the near term.

Negative market movements will almost probably send a long-term trade into negative territory over its holding period. Therefore position traders must be prepared to endure them.

Position traders with a smaller trading account, on the other hand, may conduct long-term trades without fear of a margin call by utilizing lesser leverage.

Learn about the first margin requirement and why it's a crucial consideration while trading.

Use weekly and monthly timeframes

Position traders focus on weekly and monthly timeframes and use the daily timeframe to acquire accurate entry and exit points because they are long-term traders.

From a technical sense, this benefits position traders since longer-term timeframes are more reliable than shorter-term ones.

Furthermore, currency rates show a positive serial link over longer time horizons that is not seen on daily timeframes.

As a result, while exchange rates may fluctuate at random over extremely short periods (daily), they tend to increase and decrease in a pattern over the medium/long term (monthly).

Patience is the key

Finally, position trading needs patience and discipline. Many traders may struggle to keep deals open for weeks, months, or even years.

Furthermore, many of them will be uncomfortable if a long-term trade goes against them.

Position traders must have confidence in their trading method and analysis, which is why they often have a lot of trading experience.

Is position trading right for you?

Position traders must fit their trading strategies to their particular objectives, and each style has its own set of advantages and disadvantages.

The first thing to think about is why you're position trading in the first place. So, before you start position trading, ask yourself the following questions:

• Are you trading for a long time?

• Do you want to make a career out of trading?

• Do you just like to dabble about in the market?

• How much time do you need to track your portfolio each week or each day?

A bull market with a strong trend is great for position trading. It does not easily accept the defeat of a bear market. Day trading may be advantageous during periods when the market is flat, going sideways, or just wiggles around.

It's important to determine our trading style before jumping into the markets. If you can't sit for long hours, have a job, or don't want to look at the screens constantly, then position trading is ideal for you.

Pros and cons of position trading

Let's discuss some of the pros and cons of position trading:

Pros

• Because there is a long-term element to positional trading, it is less risky than swing trading and day trading.

• Positional trading uses both fundamental and technical analysis, making it a more foolproof method.

• The majority of huge asset moves occur overnight, and positional trading can help you profit from them.

• When opposed to swing or day trading, positional trading demands less attention all the time from the trader.

• Availability of leverage is good for position trading, as it allows you to have more buying power.

Cons

• Position trading, unlike other trading methods, necessitates long-term capital.

• Position trading requires the ability to analyze asset fundamentals, which many technical analysts lack.

• Position trading has a higher cost of mistakes since stop losses are bigger than in other types of trading.

Conclusion

When deciding on a position trading strategy, consider how much cash you have, the risk-reward ratio, and when the best moment to enter or exit is.

Only the most patient traders should engage in position trading, which requires a thorough understanding of the fundamentals.