Your Guide to Position Trading
A proper understanding of position trading will allow you to add a powerful strategy to your arsenal for working in any financial market.
Before you start trading, you should understand the basic key concepts: what position trading is, how it differs from swing trading, and what its strategy is.
What is Position Trading?
Position trading is trend-following on a long-term basis, in charts covering high time frames. It often makes use of fundamental and technical analysis. Position trading is suitable for all types of markets: stocks, commodities, and forex.
Position (short-term) trader places trades with a duration of several days and closes all positions before liquidity reduction periods (holidays, summer vacations, etc.).
Position trading has existed since the first speculators emerged when people had no access to charts with low time frames, and quotes were updated only several times a day manually on the board at brokerage houses. Under such conditions, it was more profitable to trade over the long term and hold a position.
Today, the position trading strategy is used in the stock market as well as in forex, with position traders often identified with investors, but this is not quite true. It is necessary to understand the difference between this style and others:
Lack of clear deadlines. If action trading is the execution of trades within a day, and scalping - within a few minutes, then position trading is not limited to specific time limits. For example, in a year, a scalper opens more than 10,000 trades, a day trader - about 1,000 trades, while a position trader may open only 3-5 trades within the same period.
Working exclusively in the trend. In short-term styles, it is possible to open a position between levels in consolidation and with a small target, in position trading, it would be pointless, because it is designed for the entire period of the trend and maximum profit.
Application of fundamental analysis. Strategies in day trading and scalping imply the use of mainly technical models and analysis. Identification of a large global trend in the exchange requires fundamental analysis.
Holding a position in the trend, rather than working on small weekly fluctuations. This is the main difference from swing trading, which involves working on the basis of market cycles of several days. In position trading, you can hold a trade for months or even a year, it all depends on the trend.
Thus, position trading is an independent style that differs greatly from the others. Market participants can use this approach to hold short-term and long-term positions. Among its advantages:
Does not take into account small price changes, which means it does not require constant monitoring of the situation;
There is no need to be near a computer all the time. The most important thing in positioning strategy is a deep and thorough analysis, on the basis of which a further decision is made;
An open position simply needs to be monitored if there is a situation that may change the position or price.
Position Trading Strategy in the Real Market
Position trading strategy is the analysis of daily, weekly, and monthly time frames; holding an open position for at least several days to a month.
Position trading, in simple terms, is a meaningful and measured entry into a trade based on holding a position in a trend.
Each strategy implies the presence of certain basic rules, and position trading is characterized by the following:
- The signal for entry into the position is the beginning of a trend in a high time frame (with a period of 1 day or 1 week);
- The exit from the position is carried out only if there is enough evidence of the end of the trend.
The simplest idea and interpretation of this strategy is the phrase "buy and hold", often applicable to long-term investors in large company stocks (blue chips).
Let's look at a small example of position trading in shares of the tech giant Microsoft:
As you can see, the price has been in a strong uptrend for several years, which would be a good case for long position holding. The technical signal to enter the position is the exit from the consolidation at the end of 2018. Until the end of 2021, the price steadily grows, renewing the maximums. Only in November appears a serious price drawdown, which breaks out the trend line and strong support levels. At this point, most position traders close their trades, as there is a clear sign that the trend is ending.
The result of the trade could be a 250% growth, if trading is carried out with leverage of 1:20, it was possible to increase the capital by more than 80 times, with just one trade.
In terms of technical tools position trading implies the use of:
- Trend channels;
- Support and resistance levels;
- Moving Averages, especially with a 200-day period.
The main task is to determine the strong global movement, so the analysis of the news and the fundamental background is applied. However, the news is not determinative in position trading but only serves as a confirmation of technical signals.
Distinction From Investing
Position trading refers to the relatively long holding of trade in the direction of a global trend.
It is a mistake to believe that position trading is similar to investing in the common understanding. Let us consider their main differences:
- Trading involves income from the profitable resale of an asset (stocks, futures, currency) as its main source while investing gives just as much importance to passive income (dividends, monthly payouts);
- Investors rely on fundamental analysis of the asset (company performance, business growth prospects), and the trader focuses more on charts, using economic indicators only for confirmation;
- Returns are often calculated on a yearly basis, and a successful investor may wait decades for the final results.
The only similarity between the position trader and the investor is in the long holding of an asset and nothing more. Thus, each market participant must decide who they really are – an investor or a speculator.
Distinction from Swing Trading
Another popular strategy is swing trading, which differs from position trading, if not radically, then quite significantly. Swing trading is focused on average time frames and traders derive most of their income from entering the market based entirely on the exchange rate changes that will result in a change in the value of the open position. It is not fundamental but only a technical approach that is used for analysis.
Position traders, in turn, work over long periods of time. They do not dwell on minor price fluctuations but study the long-term economic situation. The strategy is made taking into account financial trends for days, weeks, and even months.
This is the biggest difference between position trading and swing trading. Position trading strategies take into account fundamental factors, such as long-term forecasts, political and economic decisions of the government, financial models, and so on. And the latter opens trades by looking at short-term fluctuations in the price of the chosen asset.
Position Trading in the Stock Market
Position trading, unlike other business strategies, is most similar to investing, which means that it provides a full range of financial tools for stock trades. The main goal of such trading is to hold a stock for as long as possible while it makes a profit. This period may last from several days to months. The main objective here is a careful study of a certain sector and its general state at the time of opening a position, as well as forecasting the situation for the future to avoid risks. Among the useful tools we can name:
- Trend Lines;
- Long-term charts with non-technical information;
- Short-term charts with monthly and weekly changes;
- Fundamental analytics.
So, the whole strategy consists of three basic steps:
- Analysis of the economic sector and the position of the selected group of stocks;
- Choosing the most profitable moment to open a position;
- Holding a stock for the longest period of time, and closing it in case of a sudden change in the economic situation.
Position trading strategy should be chosen only for those assets, for which it is possible to carry out a fundamental analysis and technical analysis, to give the most accurate forecasts and be confident in the preservation of price trends for a long period (at least a week).
Position Trading in the Forex Market
Most forex market participants use position trading as their primary approach to making money. This is due to the fact that this particular method on the forex market has the following advantages:
- Low commission costs;
- More time to make the right decision;
- No need to constantly analyze and monitor the media and charts on a daily basis in order to adjust positions.
Just as with trading stocks, the trader must have a capital reserve that can cover any losses that may occur. When choosing a currency pair, one strong and one weak currency is taken. Many participants make the mistake of analyzing only one currency and neglecting the analytics for the other.
Position trading has several basic principles which, when adhered to, provide a 90% chance of successful trading:
- Analyzing structure and market constraints;
- Identifying monthly trend reversals;
- A calm approach to trading without taking unnecessary risks or being overly greedy;
- Confidence in your own decisions based on fundamental and technical analysis, news statements, forecasts, and analysts' comments;
- Cold-blooded study of the media;
- Entering a trade with an asset size that is at least 5% risk of loss.
Advantages and Disadvantages of Position Trading
Every style of trading has its advantages and disadvantages. In scalping, it is a long stay at the computer and a lot of nervous tension, but a high level of potential profit. The advantages of position trading lie in the following aspects:
- A relatively high percentage of profitable trades, as protracted trends are much more common in high time frames and it is difficult to manipulate the market (to trigger stop orders);
- No need to monitor the position for a long time - you can monitor it once a day or even once a week;
- The possibility of calm and long-term analysis (you can think for a few days before entering);
- Less risk of psychological breakdown due to the less frequent observation of the chart;
- Huge profit potential with a gradual increase and retention of the position.
The list is not exhaustive, here are the most significant advantages of the position style. Let's move on to the disadvantages:
- Long wait for results that can only really be measured months or years later;
- High responsibility for each prediction and analysis, as it can take many days and weeks in holding the wrong position;
- Slow progress in trading (holding a position is good if the trader already has the experience, but you cannot gain it quickly by opening positions once a year);
- The need for substantial investments (to get a tangible income from position trading is only possible with a decent amount of money in the account).
To summarize, position holding is in some cases a great advantage for the experienced trader, but detrimental for beginners.
So, what is position trading – investment or trading?
After all, position trading in simple words is not an investment, but trading, because the investor hopes only for growth, believes in the company and they cannot analyze the market, but influence the company itself. A position trader can trade on both price declines and different markets.
This approach is good for experienced traders with a lot of capital, and less so for beginners with a small deposit.
Established in 2018, AdroFx is known for its high technology and its ability to deliver high-quality brokerage services in more than 200 countries around the world. AdroFx makes every effort to keep its customers satisfied and to meet all the trading needs of any trader. With the five types of trading accounts, we have all it takes to fit any traders` needs and styles. The company provides access to 115+ trading instruments, including currencies, metals, stocks, and cryptocurrencies, which make it possible to make the most out of trading on the financial markets. Considering all the above, AdroFx is the perfect variant for anyone who doesn't settle for less than the best.