Position trading is a long-term strategy in which traders hold a position for weeks or even months. How does it work and what are the pros and cons?

It is every trader's dream to be consistent in winning trades and generate huge returns. In order to achieve that, there are many paths that can be chosen and it may be different from one trader to another. This is why it's important to determine which trading strategy you'd like to focus on based on your needs, preference, and trading style. It's definitely a challenge, but once you find what you need, you'll feel much more confident and successful with your trades.

Position trading strategy

Generally, there are two types of trading methods that you can choose based on the time range, namely short-term and long-term. Short-term trading strategies tend to focus on trading opportunities that occur in the small price movements of an asset. Meanwhile, long-term trading strategies are the type of trading in which positions are opened for a longer time. Position trading is arguably the most popular long-term trading strategy that every trader should know. Let's learn more about it.

 

What is Position Trading?

Position trading is a highly popular long-term strategy in which the trader will open a position and let it sits for a long period of time, ranging from several weeks to even a couple of years. Of all trading strategies, position trading is the one with the longest holding time. Therefore, it's important for position traders to have a long-term way of thinking.

Position traders must be able to prioritize big movements and long-term trends instead of focusing on short-term dynamics unless they can affect the long-term outlook of their positions. This is also a part of the reason why most position traders don't trade actively compared to other traders.

To make a trading decision, position traders usually use a combination of technical analysis and fundamental analysis, while also considering other factors like market trends and historical patterns. Good position traders are those who are able to identify the right entry and exit points to best place the stop-loss order.

With that being said, position trading is basically the complete opposite of day trading, which mostly takes advantage of short-term price movements. This is why day traders can open multiple trades in a single day and usually close them before the day ends, so they rarely hold their positions overnight.

On the other hand, position trading is often mistaken for swing trading, but the two are actually different. Although both strategies are considered trend-following, position trading and swing trading are different in the length of the trade. Position traders hold their trades for a longer period than swing traders, who usually hold their trades for only several days to several weeks. Position trading is also different from the buy-and-hold strategy because buy-and-hold traders can only take long positions, whereas position traders could take both long and short trades.

 

Best Indicators for Position Trading

We have mentioned that position traders typically use both technical analysis and fundamental analysis before making a trading decision. Here are some of the most popular technical indicators that can be used for position trading:

 

Moving Average with a Period above 50

Moving Average (MA) is a lagging indicator, which means it shows past price fluctuations. Position traders can use signals from MAs to determine an entry or exit point. In this case, it is recommended to use the 50-period Simple Moving Average (SMA) or above, like 100-period or 200-period.

Moving Average

 

Support and Resistance

Support and resistance levels are crucial for position traders as they can show the key areas where the price is expected to reverse or breakout. Sometimes, these levels only last for a short while, but other times, they may persist for years. Position traders should focus on the latter and trade once the price passes a certain historical level.

Support and Resistance

 

Best Markets for Position Trading

Essentially, position trading can be carried out in any market, but it works best in markets that have well-defined trends and narrow price ranges. Here are some options that you could try:

 

Stock Market

The stock market is perhaps the default market that most position traders gravitate to. The reason is that in general, equities like stocks tend to follow more stable trends than volatile markets like cryptocurrencies. Thus, it is also great for traders who want to see some results on their investment without having to monitor the market all day. Moreover, position traders could perform fundamental analysis on an underlying company as a solid base for their trading strategy. Traders can then choose to buy the stock if they are confident that the company will thrive in the future.

 

Index Market

Stock indices comprise a cluster of stocks that are grouped together because they are located in the same geographical area or belong to the same commercial chain. As a result, the price action tends to be more stable and more responsive to macro issues rather than micro-level issues. This makes the index market more preferable to position traders.

 

Commodity Market

Similar to stocks, commodities are also highly suitable for long-term trades. This doesn't necessarily mean that commodities are not volatile at all, but they tend to stabilize faster compared to other assets. Remember that commodity prices are driven by the supply and demand of the underlying asset, so most of the time, the prices are stable unless there's a sudden catalyst like bad weather in the case of agricultural commodities or a mining strike in the case of metals. Such conditions may tip the balance of supply and demand and create a new trend in the market.

 

Forex Market

Generally, trends in the forex market are more volatile, so forex traders tend to focus on shorter time frames and use short-term strategies like day trading and swing trading. The main reason is that the forex market is extremely active and more sensitive to economic data and global events. Remember that high volatility is more suitable for short-term traders. But even so, you can still do position trading in the forex market by paying attention to the medium to long-term trends only.

 

What are the Advantages of Position Trading?

Here are some benefits that you can get from position trading:

  • Position trading is a long-term strategy that might lead to huge returns. It is also less risky compared to short-term strategies like swing trading and day trading.
  • Most big, significant moves happen overnight, so they can only be captured by longer-term strategies such as position trading.
  • Position trading is less stressful compared to short-term strategies because position traders don't need to check and watch the market all the time.
  • A long-term strategy means less time monitoring the trade. As a result, traders can allocate their spare time to other transactions or other activities.

 

What are the Disadvantages of Position Trading?

Like any other strategy, position trading is not perfect and has some downsides such as:

  • The strategy needs a lot of capital to execute because the trader must keep the position open for a long period of time. Since the position must be active, then the capital used for that particular trade is locked and cannot be used anywhere else.
  • Strong price fluctuations could lead up to a total loss if you're not careful.
  • Many short-term traders avoid holding a position overnight because of swap fees. Meanwhile, position traders must open their positions for a long period, so they must be prepared for the accumulated swap fees.
  • Even though position trading is considered less risky than short-term strategies, the cost of making mistakes in position trading is definitely much higher. If the trader makes a wrong decision and goes against the favorable trend, then they will lose not only the deposit but also the time that they have invested in the trade.
  • Position trading combines the use of technical analysis and fundamental analysis, whereas short-term strategies only use technical analysis most of the time. Therefore, position traders need to have extra skills in analyzing the fundamental aspects of an asset.

 

The Bottom Line

Trading is never without risk, so traders need to take some time to improve their skills and build some experience before they can achieve notable success in the market. The same idea goes for position trading. If you want to try the strategy, it is important to spend some time learning about how it works and understand the market movements.

You can start by learning to analyze past data and look for trading opportunities out of it. Once you get the hang of position trading, you could analyze the fundamental aspects of an asset that you're interested in and see if the prospect sounds good for your trade. Make sure to prepare a good risk management system on top of it all in order to prevent your trade from getting too much loss.