Position trading

Position trading is a trading style which involves holding a position open for several months to years. This is why position trading requires patience, as these traders are less concerned about short-term price movements and more focused on long-term trends.

As mentioned above, this form of trading most closely resembles long-term buy-and-hold investing, as position traders also have a longer-term market outlook.

However, buy-and-hold investors only have the option of going long, whereas position traders have the option to open both long and short positions. They also rely on a combination of technical and fundamental analysis to try and make informed trading decisions.

This form of trading does yield the potential for significant profits. However, there is also an increased risk involved, especially when a trade reverses, which could result in a total loss of capital if proper risk management has yet to be applied, which we’ll discuss in the next section.

Position traders are known to incorporate both fundamental and technical analysis when looking at possible trading opportunities. 

However, another key aspect position traders could incorporate into their trading plan, as seen above, is risk management. 

Let’s take a closer look at each of these techniques in more detail.

• Fundamental analysis: It serves as the basis for position trading because traders have a long-term market outlook. Fundamental analysis involves looking at macroeconomic data, such as GDP (Gross Domestic Product), inflation, interest rates, and growth rates. They also look at other important information specific to certain companies, such as earnings reports as well as financial statements. This information provides position traders with a specific viewpoint to identify if assets are overvalued or undervalued.
• Technical analysis: This is more chart-specific and assists traders in identifying potential trends or patterns which could assist them in making informed decisions with the data received from their fundamental analysis. Traders using technical analysis could also incorporate indicators to further assist in their analysis as well as identify specific entry and exit points for their trades. These indicators could include moving averages, volume indicators, or the Fibonacci retracement indicator.
• Risk management: As with any form of trading, there is always a certain amount of risk involved. Traders could look at various risk management tools to limit the potential risk, such as placing a stop-loss order, which is a type of order traders can place where a position will automatically close if the price reaches that specified level; this could be used to prevent majors losses when an unexpected trend reversal occurs. Another type of order traders could implement is a take-profit order, which is the opposite of a stop-loss, which will close the position automatically when a certain level of profits has been reached.

It is possible to position trade on various financial markets; however, because position traders focus more on long-term trends with narrow price ranges, some markets that experience higher levels of volatility and wider price ranges might not be as suitable.

Below is a breakdown of the various markets to position trade.

Position trading on shares

Most position traders might choose to trade shares based on the premise that the stock market tends to follow a more stable trend compared to more volatile markets such as the forex market.

Even though the stock market could see moments of volatility, especially after certain news announcements or company earnings, position traders mostly rely on fundamental analysis when evaluating a company’s true value.

Also, by using this type of analysis, traders could also possibly get better insight into where they think some of these companies will find themselves in a few months or years and make trading decisions based on that information.

Position trading on indices

Indices are groups of stocks clustered together based on certain aspects, such as being in the same geographical area, market capitalisation, or sector. Instead of focusing on individual shares, indices allow position traders to look at multiple shares simultaneously.

Indices are also known to be less volatile and have a more stable trend, which could make it easier for position traders to identify new or existing trends and make possible trading decisions.

Position trading on commodities

Commodities, much like shares, tend to follow a more stable trend. Their prices are mainly influenced by supply and demand, which means as a country’s economic health grows, they might need more resources like oil, metals, or agricultural products, pushing prices higher.

However, when a country’s economy sees a slowdown in growth, people tend to buy less and use fewer resources, which could see a drop in the price of certain commodities.

The price of commodities could also be influenced by significant events such as severe weather patterns or manufacturing malfunctions.

Position traders could monitor these price changes and use fundamental analysis data and news events about specific industries to make possible trading decisions.

Position trading on forex

Forex is the one market that position traders least use because it tends to see higher levels of volatility more frequently. This is one of the reasons why the forex market is more favoured among shorter-term traders such as scalpers or day traders.

While there are many different strategies to use in position trading, below you’ll find the four most popular strategies position traders use.

Support and resistance

Support and resistance zones are generally implemented when the price is range-bound and has no significant trend. These support and resistance zones also fall into the category of trading indicators as they are used to identify points of interest.

Support zones are areas where the price retests previous lows and fails to break past those lows. This is because when the price reaches this level, buyers will generally come in and open buy positions, expecting the price to reverse to the upside. Traders could then choose to close their positions once the price reaches the resistance zone.

On the other hand, resistance zones are just the opposite, where the price retests previous highs and fails to break above those highs. This is due to sellers coming in at those zones expecting the price to reverse to the downside. Once the price reaches the support zone, traders could choose to close their positions.

There are, however, certain aspects traders might need to take into consideration when trying to identify possible support and resistance zones.

The first aspect in identifying possible support and resistance zones is looking at historical price levels where the price retested a particular area multiple times, failing to break above or below those areas as a possible indication of future price movements.

Secondly, there are various technical indicators, such as the Fibonacci retracement indicator, to identify possible support and resistance zones.

Breakout

A breakout is another strategy involving identifying support and resistance zones where the price, with enough momentum, breaks out of one of these zones in either an upward or a downward direction.

The way it works is that the price will move to one of these two zones, and instead of reversing, it will break out, which could indicate that the price will likely continue the trend.

If the price breaks out at resistance, it becomes a future support zone; if the price breaks out of support, it becomes a future resistance zone.

Position traders could keep an eye on price movements, and when the price breaks out, they could open a buy or sell order depending on the direction of the breakout.

Position traders could use this strategy by incorporating other indicators, such as the Fibonacci retracement.

Pullback and retracement

 A pullback happens when there is a short-term dip in price before continuing in the current trend. This short-term dip (also known as a retracement) could be seen as a period of rest.

Traders could capitalise on these pullbacks as soon as the price starts to continue back in the current trend, where the aim is to open a potential buy or sell order when the pullback has ceased, depending on the direction of the prevailing trend.

It might be best not to confuse pullbacks with reversals, as reversals are a permanent change in the trends direction.

Trend trading

As previously mentioned, position traders tend to capitalise on positions with a strong trend, believing that once a trend is formed, it will continue until the market sentiment starts to change.

With the trend trading strategy, it might be best to capture the trend as early as possible and exit when a certain amount of profit has been reached or the trend reverses.

With all of these strategies, position traders could implement various technical indicators, and in the next section, we’ll look at some of these indicators that could be incorporated.

As we mentioned previously, position traders are known to utilise both fundamental and technical indicators in their trading. And as we saw in the previous section, technical indicators could be incorporated with those strategies to assist traders in making a more informed decision on potential trading opportunities.

Below, we discuss in detail two popular indicators used by position traders.

Moving averages

There are two moving averages most frequently used by position traders: the 500-day moving average and the 200-day moving average. This is because these two indicators illustrate two different long-term trends.

It’s known that when the 50 MA is moving above the 200 MA, it indicates a strong uptrend, whereas when the 50 MA is below the 200 MA, it indicates a strong downtrend.

There are also two reversal indications that can take place called the ‘Death Cross’ or the ‘Golden Cross’.

The death cross indicates a possible reversal to the downside when the 50 MA crosses the 200 MA and moves downwards.

Conversely, the golden cross indicates a possible reversal to the upside when the 50 MA crosses over the 200 MA and moves towards the upside.

It might be essential to remember that these moving averages only act as indicators and could be utilised with other forms of technical or fundamental analysis.

Fibonacci

The Fibonacci retracement indicator is another tool frequently used by position traders to assist in making informed decisions.

The tool is used by having the trader draw six lines from the highest point of interest to the lowest, or vice versa if the market is in a downtrend.

The first line is marked with 100%, the middle line is 50%, and the last line is 0%. The remaining three lines are 61.8%, 38.2%, and 23.6%.

The premise of the Fibonacci retracement indicator states that these percentages (61.8%, 50%, 38.2%, and 23.6%) work according to the golden ratio. These levels could also be seen as possible support and resistance, which indicates points of interest for traders when looking to open a position.

This indicator could also be incorporated with various candlestick patterns when the price reaches one of these levels to make a more informed trading decision.

• Position trading can be done through derivative products, such as CFDs or spread betting, which are traded on margin through leverage, meaning traders only need a small deposit amount to open a position.
• This form of trading is most closely related to traditional investing, although, unlike traditional investing, traders can also open short positions.
• Less stress is involved compared to shorter-term trading strategies such as scalping or day trading because traders won’t have to monitor the charts all day.
• There is also less time involved with position trading because traders only need to spend time on the charts when analysing the markets and then place certain order types to automate the position-taking process.

• Even though position trading works on margin through leverage, traders might still need to deposit larger amounts of funds because if a high price fluctuation does occur, it could lead to a total loss of capital.
• Because the position stays open for an extended period of time, swap fees could start adding up, leading to a big amount that needs to be paid.
• Another drawdown of position trading with leverage is that although profits are magnified, losses are also magnified because the result of a trade is based on the entire value of the position, not just the initial margin deposit.
• A trader’s capital is locked for a longer period of time, which could last several months to years.

Position and swing trading are both based on the premise that traders look at assets with a strong trend and open positions based on a combination of fundamental and technical analysis.

However, one significant difference between these two trading strategies is the amount of time a trader keeps their position open. As we mentioned, position trading keeps their positions open for several months to years. 

In contrast, with swing trading, traders only keep their positions open for several days to weeks.

Position trading is the complete opposite of day trading. Position traders have a longer-term market outlook, looking to capitalise on long-term trends. In contrast, day traders have a shorter-term market outlook, looking to capitalise on short-term price fluctuations.

Day traders also mainly focus on using technical analysis when analysing the market, only incorporating fundamental analysis when there is a breaking news event. 

Also, day traders aim to open and close a position or multiple positions on the same day, rarely keeping a position open overnight.

As mentioned at the beginning of the article, position traders look at assets with the potential of a strong long-term trend as they are less concerned over short-term price fluctuations. However, there are some other characteristics that traders might want to keep in mind before they decide to position trade.

Position traders have a solid understanding of both fundamental and technical analysis and utilise both of these forms of analysis before making any trading decisions, as well as taking into account certain market factors like historical price patterns.

They are also extremely patient and are less likely to actively trade or monitor the charts daily. They focus on their initial analysis while trying to identify potential entry and exit points for their trades successfully.

Lastly, they can take higher risks as position trading might require a larger amount of funds to open a position and keep it open for their desired duration.