Top Position Trading Strategies
In the financial markets, there are a variety of trading styles that are used. Position trading is a style which involved holding trades for a longer period than most other styles and is sometimes referred to as long-term strategies.
In this ‘Top Position Trading Strategies’ article, we cover what a position trader does and how to start position trading forex and other asset classes.
Table of Contents
What is Position Trading?
What is position trading? Position trading is a style of trading in which the trader holds a position for a longer period than most other styles. The period could be several months to years.
Position traders tend to combine technical analysis for timing a trade and fundamental analysis to analyse the potential of a long term directional move.
In some ways, the style of trading is not too dissimilar from long term trading. But, as position traders use products such as CFDs (contracts for difference), they can trade long term positions to the long side and short side whereas a traditional investor is more limited to just the long side of a market. However, due to holding costs when using CFDs position traders would hold traders for months rather than years.
Swing Trading vs Position Trading
The main difference between position trading vs swing trading is that swing traders would speculate on the shorter-term swings in the market holding trades for several days or weeks at a time. However, position trading strategies will involve holding a trade for months at a time.
Position Trading vs Day Trading
There are some major differences between position trading and day trading. Day traders will typically hold positions for several minutes or hours where as position traders will hold the trade for months at a time. Most day trading strategies are technical focused whereas position trading will involve using technical analysis and some fundamental analysis to try and capitalise on a global macro theme.
Position Trading Strategies
As position trading is simply a style of trading the financial markets you can use it on different asset classes.
Position Trading Forex
This involves identifying long term trends in the currency market. As the current market is one of the most volatile markets around, position trading forex will involve waiting for macro themes or event-driven moves to develop.
For example, when the UK voted to leave the EU in 2016, this caused a huge sell-off in the British pound. Investors pulled their capital from UK assets due to the uncertainty Brexit would cause. A position trader would have built a long term position using this event as a driver of a longer term move.
Interest rate policy can also be useful when position trading forex. During 2023, most central banks such as the US Federal Reserve started to increase interest rates after cutting them to record lows during the pandemic. However, the Bank of Japan left interest rates at record lows.
This caused long term money market fund managers to borrow money in Japan only paying a small amount of interest to do so and converting into US dollars to buy a bond paying out higher interest and then pocketing the difference between the two interest rates.
Position traders in the forex market could have used this event to buy USD/JPY which experienced a long term move higher for most of 2022. This type of position trading is known as the carry trade in forex market.
Position Trading Stocks
The stock market tends to exhibit more longer term trends than most other asset classes. This is because a stock represents a publicly traded company. As publicly traded companies aim to grow the business with more revenue and profit it can lead to a higher share price.
Long term investors may hold stock investments for years to decades. Position traders may hold a stock trade for many months to a year to try and capitalise on the early part of a trend. However, the stock market does not move up all the time as seen in the bear market during 2022.
Products such as CFDs (contracts for difference) allow traders to speculate on rising and falling prices. Therefore, position traders in the stock market can trade on both sides of the market. However, as CFDs involve overnight fees it may not be suitable for some long-term trends.
Some investors may use position trading strategies on stock indices to hedge a portfolio of stocks. While challenging to get right, the theory suggests that if a stock portfolio is declining, a trader can trade a stock index short and profit from a falling market. Theory suggests this could hedge the portfolio as any profits from a short trade could cover some of the losses experienced in a long only stock portfolio.
Position Trading Commodities
The commodity market can also be traded using position trading strategies. This is because throughout time commodities can exhibit long term trends although they are usually more volatile than a stock. This is because there are far more influences on the price of a commodity such as supply, demand, geopolitical issues and exchange rate fluctuations.
Commodities such as gold and oil can also go through periods of long term up trends and down trends. Oil prices crashed during the pandemic period only to rally sharply afterwards. Position traders would attempt to capitalise on these moves by trading CFDs or commodity ETFs.
2 Position Trading Strategy Examples
Some position trading strategies include:
Trend trading
This involves identifying a market exhibiting long term trends through technical analysis and fundamental analysis. Market cycles and indicators such as moving averages can help confirm a trend, while the fundamental narrative can help to drive a trend further in a certain direction.
For example, in the below weekly chart of USDJPY, the price broke out from a trading range or symmetrical triangle formation chart pattern between the two black lines. Since the breakout, the price bounced off the moving average in July 2021 starting an impulse cycle higher confirming a trend is taking place.
Position traders could have used this clue to initiate their next position on a bounce off the moving averages and used a trailing stop loss to capitalise on multi-month trends.
Breakout trading
This involves identifying a period of consolidation in a market and trading price once it breaks out of this consolidation period. Traders can use technical analysis tools such as horizontal support and resistance lines to confirm a breakout and fundamental analysis as the driving force behind the move.
The below weekly chart of USDMXN, shows a period of long-term consolidation between 2020 and 2023. However, the breakout of the trading range began at the end of 2022 and then started to trend lower throughout 2023. Traders could have traded the price as it broke through the bottom of the range, or waited for a trend to develop and look for positions around the moving averages.
What are the Advantages and Disadvantages of Position Trading?
Below are just a few advantages and disadvantages of using position trading strategies.
Advantages of Position Trading
- A chance to capitalise on long term trends.
- Trading longer term trends involves less short term decision making.
- Position trading can provide traders the potential to capitalise on global themes.
Disadvantages of Position Trading
- Markets can be very volatile so while a trader may want to trade a long-term move, the market may not be in the right condition.
- Trading capital is tied up for longer which could mean less capital on other opportunities that may perform better.
- If using margin based financial products such as CFDs (contracts for difference), the overnight swap fees can eat into most of any trading profit.
5 Tips for Position Trading
Here are a few tips for position trading:
1. Create a set of rules
A plan is very important when position trading. It should include a consistent set of rules on what to analyse to identify the right conditions to execute a long term trade. These rules could be from technical analysis, fundamental analysis or a combination of both. Using financial media to help with the research can be useful as most journalists cover big themes that are developing in the market - especially the stock market with themes such as artificial intelligence. Using this as a basis for your research but then using your own technical analysis to identify when to trade can be a useful combination. You can also tune in to the live trading webinars by Admiral Markets to keep abreast of market themes.
2. Identify your risk management parameters
It is also important to create risk management rules. Will you take the full trade on the first setup? Or will you scale into the trade and build a position of different stakes over a longer period of time? Risk management is key to successful position trading. You do not want to find a potential trade and then over-risk or under-risk your position as this will cause a whole range of emotions that can lead to poorer decisions in the future. Identify them beforehand and stick to them. A trade journal can also be useful to help guide you in your decisions.
3. Have realistic expectations
Social media has glamorised the world of trading. Many people only show you their winning trades and not their losing trades. This causes major issues between expectations and reality. Understand that any form of trading or investing involves winning and losing. The key is to identify high probability opportunities through your rules and then execute trade with proper risk management to balance the probabilities of winning and losing. You can start with a demo trading account to practice your skills first until you are comfortable for live trading.
FAQs on Position Trading
1. What is a position trade?
Position trading strategies involve holding trades for the long-term and positioning yourself for the move. It can be done on forex, stocks, indices, commodities and any market is exhibiting long-term trend characteristics.
2. Is position trading good for beginners?
Position trading can be for all levels of traders. However, it involves research, practice and proper risk management as with any form of trading wins and losses are involved.
3. What is an example of a position trade?
A position trader may find the stocks that could grow with the rise of global macro themes such as AI (artificial intelligence) and then start building long term positions in these stocks. Or, a position trade may involve analysing the prospects of a central bank raising interest rates and then building a position in that currency to capitalise on higher rates.
4. How does position trader work?
A position trader will hold a position for a long period time such as several months or years. They try to capitalise on any long-term trends, or moves, developing in the market.
5. Which time frame is best for position trading?
As position traders hold trades for months or years at a time, the daily, weekly and monthly time frames can be used to identify the long term moves to use position trading strategies.
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