Ultimate Position Trading Guide

What is position trading? This is a question I would expect from my readers, and it is one that I had received a few days ago.

As a beginner in forex trading, you might be interested in the question of what is position trading if it is the first time you are hearing about it.

Actually, there are those traders who have been in the market and have heard the concept of position trading being mentioned here and there but were never curious to know what it was all about. 

Sometimes I even get mesmerized when I encounter traders that have been trading for some months or even years, but they do not know the type of trader that they are.

These are the traders that will be trading all the timeframes so long as they think there is a trading opportunity. It is very hard to master your trading strategy if you operate in such a manner. 

what is position trading

What is Position Trading? 

To most active traders, position trading is a well-known trading technique where one holds a position in a security for a long time, which can go for several months or even years. 

Position traders tend to overlook short-term price movements and prefer to assess and gain from longer-term trading trends. 

Position trading is similar to investing, and the key difference among the two is that buy-and-hold investors are limited to just going long. A position trader will also make money by going short.

From all trading strategies there are, position trading has the longest time span. 

Additionally, with this strategy, a trader is more likely to gain more profit, and the risk level involved is high too.

Core Position Trading Approaches

Fundamental analysis 

This is particularly important to position traders who plan on holding the trading assets for a long period of time.

Fundamental analysis in this type of trading is mostly related to stock-picking as it enables traders to acquire winning stocks that could give high returns.

Economic situations for different countries also give an idea of the currency pairs to focus on.

Technical analysis 

This is used to identify trading trends in asset prices that make it possible for a trader to generate profits.

It also purposes on identifying trends that last long enough and also gives warning signs of possible trend reversals.

This analysis normally gives position traders two choices of either trading the assets that are yet to start trending with the availability of strong trending potential or to trade the assets that are already trending.

In the first option, there could be higher returns, but with higher risks and need for more research.

In the second option, there is less intensive research needed, but the trader may not earn much profit.

The second option is safer for a position trader since the market has already indicated the direction that it is headed.

The two options are the ones that define a trader who aggressive and one who is conservative. An aggressive trader will go with the first option while a conservative trader will opt for the second option.

Position Trading Strategies 

Breakout Trading 

This is a good trading technique as it signals the commencement of a trend.  

However, to make good use of this trading strategy, you ought to have the ability of identifying support and resistance levels in the trading chart.

There is also the probability of a breakout trader being easily stopped out due to false breakouts in the market.

Support and Resistance Levels

 They make it possible for position traders to recognize when the price of an asset is likely to experience a reversal when it is in an uptrend or downtrend. 

The support is the price where an asset would hardly fall below, and the resistance is the level where an asset’s price is not expected to rise beyond.

Many traders have an issue drawing support and resistance levels appropriately; hence end up having cluttered charts making it difficult to conduct proper market analysis.

Pullback Trading Strategy 

Using this strategy, position traders are able to buy low and sell high, provided the price of an asset is able to recover following a temporary dip, other than continuing with a permanent reversal.

This would be a very good strategy for breakout traders to implement. After the breakout, you wait for a reversal. 

In case the market moves without giving a pullback, just let it go and move onto the next trading opportunity. Never chase the market. You will become an emotional wreck.  

Range trading 

This is a favorable trading strategy in markets that move up and down with no definite trend for quite some time.

Pros and Cons of Position Trading

Pros

  1. Easier on fees and commissions

With position trading, the trader is not always moving in and out of trades and will, therefore, not accumulate large amounts of fees and commissions, unlike in short-term trading strategies.

  1. You have the ability to ride the major moves

 Position trading enables you to hold moving stocks or currency pairs for a substantial amount of time, without having to jump in and out of trades. 

There is a possibility that this works in your favor if you trade on the right currency pair or stock.

In the end, you could be having a very high risk to reward ratio. These are the types of traders that even end with a risk to reward ratio of 1:50

  1. You do not need high-speed connections

Position traders commonly trade while in motion and thus don’t require high-speed trading connections, unlike scalping and day-trading strategies.

  1. You tend to get time off the screens

In case you have a fulltime job, are still in school, have very many responsibilities, or just love your leisure time, position trading can be the best option for you if you develop your trading strategy around it.

Cons 

  1. Your capital is tied up for long periods

Because position trading entails holding just a few trades for an extended period, your capital is tied up in only those positions. 

This could lead to you missing out on other open and exciting trading opportunities since you may not have sufficient margin to enter the trades.

  1. Need for large directional moves

Position trading is good for bullish markets when it comes to stock trading since dead markets hardly allow you to make large moves. 

With this, a position trader is likely to miss out on major moves in stocks.

  1. Longer learning curve

Since position trading has a long-term trading strategy, you end up making fewer annual trades as compared to the trades you would make as a day or swing trader.

This can result in less expertise in the market since you do not have time to gain the relevant confidence and skills. 

This is because you will not be able to conduct the desired post-analysis so as to assess how your trading is progressing through the use of your trading journal

  1. Requires so much patience

With position trading, you take up a position in a given trade and then wait for weeks or even months as the trade move up and down.

There are periods when your trade might even be negative for a long period.

For traders, this is something that can be very frustrating especially if you are the type of trader that is easily excited by small moves.

  1. Sniper-like trading is needed

 Daily trading opportunities are so many, but as a position trader you have to ignore them as you wait for the best opportunity for a long-term trade.  

As a trader you are always watching out for your planned trade set up. 

As I normally say, always try to stay within your trading plan while executing any trade.

Is Position Trading for You?

It is very important for investors and traders to use trading styles that match their individual goals and personality.

Every trading style definitely has its advantages and disadvantages, and therefore the first point a trader should consider is the reason why they want to invest in the trade.

 Maybe your reason is to make a living out of trading or trading simply for the love of it.

You should also consider the amount of time that you plan on setting aside for trading on a weekly basis.

position trading strategies

Position Trading is for You If

  1. You are okay waiting for your ultimate reward. With this being a long term forex trading, it could earn you hundreds or thousands of pips
  2. Your level of patience is quite high.
  3. You have an independent mind. As a trader, you should be able to ignore popular opinion and use your own acquired knowledge to anticipate the direction of the market.
  4. You have enough capital for the long waiting periods, and also in case the market goes against your expectations.
  5. You must properly understand the trading fundamentals and have a good idea of the way the fundamentals impact your currency pair with time.
  6. You are a hardcore with the ability to handle all the pressure that comes your way.

Position Trading is not for You If

  1. You are not a very patient person.
  2. Popular market opinions easily change your trading perspective.
  3. Your starting trade capital is not enough to begin.
  4. You don’t clearly understand the way trading fundamentals impact the markets with time.
  5. You get agitated and lose hope when the market does not go as you expected it would.
  6. You like quick results, meaning you cannot wait for months or years as it is expected in position trading. 

From the above information, you have learned what is position trading and the pros and cons that are associated with it. For position trading, just like any other trading style, you have to assess several aspects about yourself to decide whether it suits you or not.

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