What Is Position Trading? Is It Better Than Short Term Trading Strategy?

Forex market accommodates different trading personalities and styles. While many traders are attracted to the Forex market’s 24-hour trading and fast moves, others choose the Forex market for its long trends and responsiveness to key support and resistance areas. Position trading is a popular long-term trading strategy that allows individual traders to hold a position for a long period of time, which is usually months or years. In this article, we will focus on some best practices around a position trading approach in the market. 

What Is Position Trading

The goal of any trader/ investor who wants to be active in the financial markets is simple. How does one make effective decisions in an uncertain and dynamic market? The solution is finding an approach that will work effectively in the long term. That’s why position trading could be the solution to this problem.

Position trading is a common trading strategy where an individual holds a position for a long period of time, typically over a number of weeks or months. Position traders ignore short-term price movements in favour of pinpointing and profiting from longer-term trends. It is this type of trading that most closely resembles investing, with the crucial difference being that buy-and-hold investors are limited to only going long.

Since these types of trades last for a longer period of time, the position trading strategy requires an in-depth knowledge of fundamental factors that can influence prices over the long term, as well as knowledge of technical timing models to be able to get in and out of positions at the most opportune times within the longer market cycle.

Position Trading Strategies

The strategies below can be used by position traders to analyse price charts and make predictions about market movements.

1. Support and Resistance

A support level is the price an asset that, historically, does not fall below. You can have short-term support levels as well as historical support levels that hold for years. Opposingly, the resistance level is the price of a security where it historically tends not to be able to break.

Support and resistance levels help position traders recognize when price movement is more likely to fall into a downward trend or increase into an upward trend. Based on their assessment, position traders can decide whether to open or close their position on a particular asset.

When the price action breaks a major support or resistance on the chart, this is likely to cause an advance to the next higher resistance level in case of an upside break or a decline to the next lower support level in case of a downside break.

On the contrary, if the price action fails to break a key level and instead bounces in the opposite direction, we can then consider this as a possible price rejection and position ourselves for a corrective move or new trend in the opposite direction.

2. Breakout Trading Strategy

Breakout trading involves trying to occupy a position in the early stages of a trend. Usually, a breakout strategy forms the foundation for trading large-scale price movements.

In breakout trading strategy traders wait for the price line to cross the support or resistance level.  When the overhead resistance is broken, the trader enters a long position. Conversely, he enters a short position when the price breaks out the support line.

As the chart above, when the price breaks out through the support level, traders go short. And when price breaks out through the resistance level, traders go long.

3. Pullback and Retracement Trading Strategy

Pullbacks are short moments of market reconciliation that happens when the market is rising upward. Traders look for pullbacks in their trading strategies to plan entry. The policy is to buy low and sell high. So, when the price dips during pullback, traders enter the market.

A Fibonacci retracement is form of technical analysis which can help position traders eliminate chances of trend reversal when the pullback happens and decide when to open and close a position.

Fibonacci levels are mainly used to identify support and resistance levels. When a security is trending up or down, it usually pulls back slightly before continuing the trend. Often, it will retrace to a key Fibonacci retracement level such as 38.2% or 61.8%.

In the chart above, the Fibonacci retracement levels are plotted using the Swing Low at 1.16897 and the Swing High at 1.17502. The retracement levels are 1.1735922 (26.3%), 1.1727089 (38.2%), 1.171995 (50%) and 1.1712811 (61.8%).

In the example above, the EUR/USD enjoyed a bullish trend before it began to retrace and move lower after reaching the high at 1.17502. With retracement during an uptrend, the expectation is that if EUR/USD retraces from this recent high at 1.17502, it will find support at one of the Fibonacci retracement levels where it will reverse up from.

4. Moving average over 50 days

The 50-day simple moving average indicator is an important technical indicator in position trading. The reason is that 50 is a factor of both 100 and 200, which have corresponding moving averages that are rather precise indicators of significant long-term trends.

For example, we use 50-period moving average and the 200-period moving average in position trading:

As the chart above, when the 50 MA crosses over the 200 MA to the upside, you have what traders call the Golden Cross. Enter a buy trade. A Death Cross occurs when the 50 MA crosses the 200 MA to the downside. And this is a signal for a short order.

Position Trading vs Short Term Trading

Position trading can be considered the polar opposite of short term trading strategy such as day trading, which mostly takes advantage of short term market fluctuations. Day traders aim to buy and sell multiple assets with the aim of closing their positions before the end of the trading day, rarely holding them overnight.

Advantages of position trading

1. Less stress

One of the biggest advantages that position traders have got is they have less stress in the market than other traders. Day traders and scalpers who trade the market has a high risk and market volatility of losing their profit. They can also lose their capital in the market. Position traders are saved from this stress. They can trade the market with time.

2. Avoid market fluctuations in short time

The forex market changes instantly. To speculate on those moves, one needs a strategy to avoid the daily swings that take you out. Position trading helps traders avoiding daily market swings.

3. More time to spend on transaction

There is more time to spend on other transactions or other professional activities, as position trading only takes time when analysing the prospective asset.

Disadvantages of position trading

1. A lot of capital is needed to keep positions opened for a long period of time, as trades can last for several months, meaning that the capital is locked.

2. Position traders miss out on many of the shorter term opportunities that day traders and swing traders can use to amplify their profits.

3. The risk involved in position trading is much lower than that daily trading or swing trading, but if a mistake is made, it will likely be fatal. If a trader goes against the trend, they will lose not only his deposit, but also the time they invested.

Conclusion

Most successful position traders are well versed in macro-economic data and typically look to initiate a trade based on their fundamental outlook, and then use technical studies to help time their trades. If you have a great understanding of fundamentals and have good foresight into how they affect your currency pair in the long run, you might be a position trader. Otherwise, you may need more practise to start position trading.