Investors typically have two choices, they can either focus on short-term trades, taking advantage of price fluctuations to make a profit or concentrate on the long run.
When going the second route, it's identified as position trading a highly attractive long-term trading strategy that enables investors that are acting solo on the market to keep their position for a prolonged period, sometimes months, but it can even get stretched out for years.
Position traders disregard movements in price that occur in the short-term, and favor implementing more accurate fundamental analysis and rely on long-term trends. And this style of trading is alike to investors who practically use the buy and hold tactic of investing.
However, there is a big contrast, traders that practice buys and holds are able only to have long positions, while position traders can use both long and short.
It's an investment strategy that can get used in most markets including Forex markets and other commodities markets.
Position trading can be a useful trading style for investors that don't want to get exposed to stress and invest the time in monitoring trades every day.
If implemented correctly, this strategy will make it possible to profit from long-term movements in the price of a given asset.
Also Read: How Market Conditions Affect Your Trading
Contents
- What's at the Core of Position Trading
- Do Position Traders Make Profits?
- Is Being a Position Trader Right for You?
- The Plus and Minus of Position Trading Strategies
- Importance of Support and Resistance
- Markets for Position Trade
- How Risky Is Position Trading?
- Conclusion
- FAQs
What's at the Core of Position Trading
We already pointed out there are usually two methods that are implemented for trading. Investors can act as day traders and benefit from tiny price movements by purchasing and selling during the same day.
The alternative option is the concept of position trading, and the key is in having a long-term plan, for retaining a position until a large price move happens, and this can translate into weeks and months.
To be a position trader, one has to have the nerves to ignore the daily fluctuation that causes prices to move up and down and expect the big payoff that comes from long-term price changes.
The entire concept depends on the perception that the market function in trends. With investors starting a trade with the intent to seize a long-term price trend.
The catch with position trading is that investors have to be ready to sustain small losses, larger losses can get prevented with stop loss measures.
Patience is necessary for traders not to hesitate and leave the position, but stick with the plan and aim for the profit target set at the start of the position trading strategy, which relates to the percentage move of the market.
Do Position Traders Make Profits?
The biggest drawback of position trading is that financial markets don't prefer to trend, rather they stay in a sideways range for most of the time.
This is a trap in a sense because, during the sideways market, the option for the position trader is limited, and he has to be passive, choosing to hold the position and do nothing or make adjustments by moving out of profit and a loss. Traders can also take no position and ignore the market.
In cases when there is a strong price trend during a bull market or the opposite is the case in a bear market, assuming a position to use the trend is logical.
But there is no point in this situation to move in and out from the bull market with the goal of making small profits.
The final result will be missed opportunities in the trends and significant brokerage expenses.
Is Being a Position Trader Right for You?
For success in trading, it's important to pinpoint the strategy that's appropriate for a trader's mentality and lifestyle.
Some people just cannot devote the time and energy for long-term strategies. Job requirements, and family obligation can all influence that time you can invest in observing trade sessions in front of a screen.
If you are in a similar situation, that position trading can free you from other obligations.
Another large benefit of position trading is the option to invest more time in making decisions, unlike the situations confronted by day trading and swing trading.
Investors that have difficulties coping with pressure during stock market situations, then position trading can provide the peace of mind you want.
Also Read: A Complete Guide To Your Trading Plan
The Plus and Minus of Position Trading Strategies
Trading strategies get created with the aim of producing results by factoring in the best method that is applicable to a given situation.
But not every strategy is totally precise, and before committing to a trading method, it's important to have a clear understanding of the advantages that get offered and what disadvantages result in using the strategy.
Pros of Position Trading
Let's check some of the advantages of position trades:
- Reduced stress for investors, unlike traders that use short-term strategies, are not forced to constantly observe their positions.
- Big profits are possible with a long-term strategy.
- Time management is more productive, and more resources can get devoted to other trades or business activities because position trading only requires analyzing the prospective assets.
Cons of position trading
We can examine the disadvantages of position trades:
- Significant investments are required, using small capital is unfeasible. If strong fluctuations in price happen it can result in a complete loss of the funds invested.
- To keep positions open, there is a need for large funds, because the position gets opened for a long time, and the money gets locked.
- There is a risk of increased fees piling up if the position remains open for a prolonged time.
- With position trading, the risk is smaller than with day or swing trading, yet mistakes can be more costly. Going counter the trend can result not only in the loss of the money invested but also the time devoted to the trade.
Importance of Support and Resistance
Position traders benefit from support and resistance levels that help them identify if the price movement of an asset has more chance to decline in a downward trend or rise into an upward trend.
With this assessment, investors can choose to initiate or end their position on a given asset.
The support and resistance strategy makes it possible for investors to read chart patterns, which is a highly practical skill when holding long-term positions on a given asset.
Short-term support levels can happen, and historical support levels that continue for years.
Alternatively resistance level reveals the price gate, which an asset is not possible to surpass.
Position traders can look at long-term resistance, and chose to close a position, with the assumption that the asset will decline after reaching the level.
Similarly, position traders can purchase the historic support levels when convinced that an upward long-term trend is going to emerge.
Markets for Position Trade
One of the advantages of position trading is that as a concept it can get implemented in a wide variety of markets, without any special modification.
Stock Markets
The default choice for position traders is the equity market. And the reason is the fact that retail investors are looking for a profit in a given year, without devoting the time to observe the market daily and make adjustments to the current strategy that gets applied for a particular asset.
Stocks are a good option for thematic investing because government policies can benefit a given firm, by imposing circumstances that will improve profits in the following year.
Commodity Futures Markets
The prices of commodities get influenced by the supply and demand for a certain commodity. It is the preferred asset class for professional trending, which is called CTAs.
During times when this supply and demand are more balanced, and a factor like a drought can impact agricultural commodities everything is no longer stable and forms a continuous market trend.
Forex Markets
This is an interesting situation because generally, forex traders concentrate on short-term investments. They trade daily or are active in swing trading.
The key reason for this preference is the fees that get charged for keeping a stock past regular working hours.
But there is another factor, the high level of activity in the forex market, which produces multiple trading opportunities, as new economic factors and political events are emerging.
With the ever-present volatility, investors prefer the reduced risk that comes with short-term trading. However, forex markets provide position trading opportunities with medium-term trends.
Index CFDs
Indices encompass group of stocks, and price action is more balanced and reacts to macro factors rather than micro-level such as CTO leaving a corporation.
When planning to open a position in the stock market, if you identify a bull market and want to be a part of the trend, or maybe you expect a bear market to form and want to short the stock index.
The two options are possible for using index CFDs in position trading.
How Risky Is Position Trading?
At face value, investors think that position trading is a much easier and safer option than short-term trading.
Usually, the shorter the period the bigger the risk. Because short-term market fluctuations or unplanned events can disrepute the market, preventing traders to react to the situation, and modify the approach.
When investing in the long term, changes are less frequent and develop longer. Yet there are circumstances that can negatively influence long trading positions and result in losing money rapidly.
Conclusion
It looks simple, but the reality is position trading is dependent on technical analysis that needs to be part of an investor's repertoire of skills no matter the trading styles applied in the market.
Position traders also use technical indicators to estimate opportune price trends in the market.
By knowing the market circumstances traders can decide what strategy is most beneficial, and many believe that with position trading, there is less need for analyzing the market.
Although the concept frees up traders for other activities, positional trading indicators get used to make sense of the market.
Newbie traders may think that investing in general looks like position trading. In both cases, the asset is kept for a prolonged time in the expectation that profits will get generated.
Yet the difference is in the fact that investors hold on to the stock because it offers dividend payments. And then if there is a rise in the stock price the capital gains will also increase.
Most investors aren't bothered by the frequent fluctuations in the price. In conclusion, position trading can be a practical option if you have the capital necessary to sustain a long-term investment.
FAQs
What Is a Position Trade?
Position trading is a strategy that gets based on the buy-and-hold method. Traders purchase a financial asset or real estate and keep it for a prolonged time to profit from expected price appreciation.
How much do Position Traders Make?
It depends on the assets that get used in the strategy, fees that have to get paid, and how the circumstances develop in the market. Position trading can be profitable if things go as planned, yet there is a risk factor, and for profit, there is a need for large initial capital investment.
Position Trading vs Swing Trading?
The biggest difference between swing trading strategy and positional trading is in the time frame between purchasing and selling an asset. Position traders typically hold their assets for months, sometimes even years. And swing traders work in smaller time frames, purchasing and selling assets in a few days.
What Is a Good Strategy for Position Trading?
Breakout trading is a solid option in the initial phase of a trend, but identifying trading opportunities makes it necessary for investors to be able to locate support and resistance periods in the market.
