What is position trading? The full guide to positional trading strategy

If you want to trade but cannot devote your full day to market analysis, position trading is a great alternative.

What is position trading and how does it work?

Position trading implies opening a deal for a long term. Instead of monitoring daily price fluctuations, position traders hold assets for several weeks, months or even years.

In other words, position trading is investing (although it’s only one approach out of many long-term options). Traders make up their portfolios from shares, stocks, futures and so on. Funds and pension plans are other alternatives for long-term investments. At the same time, position trading in forex can also involve short deals.

This approach is based on fundamental and technical analysis for revealing market trends and identifying risks. Traders analyze charts and make price predictions before buying a particular asset.

This trading style has a few peculiarities:

• Lack of clear deadlines. While day trading involves making transactions within one day, and scalping — within a few minutes, position trading is not limited to specific terms. For example, during one year, a scalper opens more than 10,000 trades, a day trader — about 1,000 trades, and a positioner can open only 3-5 trades in the same period.
• Finding trends. In short-term styles, you can open a trade between consolidation levels and with a small target. In position trading, it would be pointless because it is designed for the entire period of the trend and maximum profit.
• Application of fundamental analysis. Positional trading strategies in day trading and scalping involve using technical models and analysis. Identification of a major global trend on the stock exchange also requires fundamental analysis.
• Maintaining a position in a trend rather than working on small weekly fluctuations. This is the main difference from swing trading, which involves working on the basis of market cycles of several days. In position trading, you can hold a deal for months or even a year, it all depends on the trend.

Features of a position trader

Who is a position trader? They keep investments for a long period (a few weeks, months or even years). For this reason, they are not concerned about short-term price fluctuations, unless these movements can have a long-lasting influence on their position. As a rule, position traders don’t open too many deals and prefer a buy-and-hold position trading strategy.

So, what does position trading require?

• A large deposit. Fluctuations over a long period of time can be very significant, so if the deposit is small, it is very likely to get out of the deal by having received a margin call.
• Cold head. A person who chooses to trade this way should deal with possible losses without stressing. Over a long term, the likelihood of serious market fluctuations is pretty high.
• Excellent knowledge of the market and the chosen assets. For example, if those are currency pairs, you need to know the peculiarities of their movement: NZD/USD hardly moves at all, while GBP/JPY, on the contrary, is characterized by ever-lasting high volatility. If the assets are shares, you need to be able to analyze the company’s documentation. In both cases, the trader must monitor the political situation in the country where the company is registered or to which the currency pair belongs.
• Ability to trade independently. A position trader should not heavily rely on the opinions of the media and colleagues and persevere in his own strategy.

Also, position traders should be patient, attentive to both details and a broader picture, and tactical.

Best position trading strategies

Depending on the market and profit goals, position trading can be based on different strategies. You can select one based on preferable indicators and analytical tools. In all cases, the whole point of position trading is finding trends and predicting asset prices.

Support and resistance trading strategy

The concept of support and resistance trading is a popular yet powerful method for identifying entry and exit points. Support and resistance levels are key price levels on a price chart that tend to prevent the asset cost from rising or falling further. Usually, when this zone is tested multiple times, it is the right moment to trade and identify risk.

In the example above, the daily chart of ATOM was revolving around the 28 support area. See how the action was sustained around this level before (blue line) and it ended up providing a good entry point where the risk was low compared to the possible move up — this is a perfect time to trade.

When finding support and resistance levels, it is important to note the following factors:

1. Analyzing historical price levels is a must: periods of serious shifts (gains or losses) in price will indicate future movements.
2. Previous support and resistance levels of an asset can also help traders find the next similar periods. For example, if a support level is broken, it can become a resistance level in the next trades.
3. Technical indicators should be thoroughly studied because they also serve as dynamic support and resistance levels that change with the price of a given asset.

Breakout trading strategy

A breakout trade is when the entry is at a point where the corresponding swing high is broken. This high can be an all-time high or an actual level determined by a monthly or yearly chart.

The idea is that after the entry is triggered, the price should continue to move. If not, the position must be closed immediately.

BTC/USD is a good example. After the breakout, it went straight up, breaking the most relevant previous structure. The stop loss should have been just below the bar that triggered the breakout.

Range trading strategy

Range trading is a method that seeks to exploit trading opportunities when a cryptocurrency bounces off a support and resistance level that acts as a price barrier. The price zone between support and resistance levels is what most investors refer to as a range.

Typically, a price range is set when we have multiple bounces from support and resistance levels. On the price chart, it will look like the price is “trapped” inside a pin, with no clear direction.

In the context of position trading, the basic idea is trading breakout in the prevailing trend direction. For example, if a stock is in a strong uptrend, you will want to trade at the resistance breakout level.

On the chart above, we identified a well-established range that eventually fueled the move higher once the price broke above the upper end of the price range — this is the right time to trade.

Pullback and retracement trading strategy

With this position trading strategy, a trader is looking for an entry on corrective action in the context of the entire trend. The basic idea behind pullback trading is to trade during correction or during a trend move and use additional price action prior to some exhaustion. For example, a Doji formation or a Fibonacci retracement would be good for accurate timing.

In this case, the aim is to buy low and sell higher once the asset moves out of the pullback and restores the upward trend. However, a pullback should not be mixed up with reversal. When the trend reverses, it is a long-term or permanent deviation of price movement.

Position share trading

Position traders use different assets with company shares being among the most popular options. As a rule, stocks may follow more stable trends than volatile markets like cryptocurrencies or forex.

Even with all the political and socio-economical fuss around, fundamental analysis of the issuer company provides a solid base for trading — it allows traders to identify the true value of an asset. It is possible to predict where a company or even the whole sector will be in a few months or years.

Position commodity trading

Commodities like stocks and shares stay under the influence of long term trends rather than other market conditions. They could be volatile, as well, but tend to stabilize quicker than other markets.

Position index trading

Stock indices comprise sets of companies that are combined based on certain criteria, such as a common location, industry, etc. Thanks to these facts, indices show more stable and pronounced trends and are preferred by position traders.

Position trading in forex

Currency pairs are used by position traders less often because they are highly volatile. However, they can be useful for short positions like day trading or scalping.

Best positional trading indicators

There are several indicators that help traders define trends and make price predictions. When you practice position trading, it is crucial to define whether you deal with a long-term trend or it is another phase of the market. At the same time, finding perfect market timing is not critical — there are many entry and exit points when you deal with long-term trading.

Simple Moving Averages: 50, 100, 200-day SMAs

Moving averages show the direction of the trend, i.e. where market participants “push” the price. Note that MA is a lagging indicator: asset price moves first, and MA follows it with some delays. If you want to trade with higher accuracy, use EMA because it uses the data of the last 4-hour periods, which ensures better reliability of the data.

Position traders use crossovers of moving averages as signals to trade (enter or close positions). When the price is above or beyond the moving average, it signifies the moment to trade (be in or out of the deal).

MACD

This is a sort of moving average that is often used by traders who prefer to keep trading charts clean from bars or candlesticks. Similar to MA, MACD line crossovers can signal to open or close deals. When MACD is above or below the zero line, traders should take action.

Relative Strength Index (RSI)

The indicator calculates the strength of the upward and downward impulses based on the difference in bar closing prices over the period, smoothes the values ​​of the moving average and calculates their ratio. The result is a line that strives to reach 100% when prices rise or 0% when prices fall.

When the line is located near the boundaries of the range, the asset has entered the overbought or oversold zones. This situation may indicate “overheating” of the market and the imminent reversal of the trend. Touch of the overbought and oversold levels is regarded as a trade signal.

Stochastic Oscillator

The indicator allows you to evaluate the increase/decrease in asset price for a given period and is presented in per cents. The proximity to the borders (100% for growth and 0% for a fall) indicates the development of a trend. Similar to RSI, it uses the concept of overbought/oversold zones.

Stochastic Oscillator allows traders to notice strong signals of a trend change. It also generates leading signals due to the intersection of the main and signal lines (the second one is the result of smoothing the first one with the help of a moving average).

Best markets to position trade

Now, when you are armed with indicators, it’s time to choose suitable trading instruments. Position traders enjoy a decent choice of markets to play on.

Stocks

Equities are the most popular market among the majority of traders. The reason is simple: traders want to reap profit within a few months or a year but don’t have time or willingness to monitor markets and trade on a daily basis.

Stocks are perfect for mid and long-term investing because certain changes in government policy or company development can trigger price growth and let traders earn within the next 6-12 months. With some stocks, it is possible to trade even without technical indicators — it’s enough to watch what is happening with the issuer.

Forex

Unlike investors, forex traders focus on short-term periods — they prefer day trading or active swing trading. One of the reasons for that is the overnight swap that they have to pay for holding a share after 5 P.M. by New York time. At the same time, the forex market offers a myriad of trading opportunities and higher volatility can be beneficial for mid-term trading, as well. For position traders, this is a less preferable option but it’s still possible to keep trade positions open for a few days or weeks.

Commodity futures

This is a common choice of fund managers who are very experienced in following trends. Commodity prices mostly rely on supply and demand. Most of the time, this ratio is stable but can change because of seasonal factors, such as weather changes, or transportation issues, and so on.

Index CFDs

Since indices are made up of a group of stocks, their price tends to be more stable and alter under the influence of bigger issues, such as CEO leaving a company. If you want to trade index CFDs, you should track what is happening in the industry as a whole and in particular companies comprising the index. With CFDs, you can earn on both bear or bull markets — they are suitable for position trading and hedging. That’s why they are a must-have in your portfolio.

Cryptocurrency CFDs

Despite their volatility, cryptocurrencies representing some serious, fundamental projects like Bitcoin, Ethereum, or exchanges (like Binance’s BNB) can be good long-term investments. Since this is a new market, traditional instruments and approaches to price predicting may be inapplicable.

Position trading vs swing trading

Position trading vs day trading

Day trading is the absolute opposite of position trading because it involves opening and closing positions within one day. They rarely trade overnight because prices can move in an unpredictable way, and there is a fee involved.

Advantages of position trading

• Relatively high percentage of profitable trades, since protracted trends are much more common on large time intervals and it is difficult to manipulate the market (knock out stop orders).
• It is a nice choice for people with full-time jobs because positions can be monitored once a day or even a week.
• The possibility of calm and long-term analysis (you can think for several days before entering).
• This is a less stressful trading style because there’s no need to take quick actions and monitor the market constantly.
• Profit potential with a gradual increase and retention of a position.

Disadvantages of position trading

• It takes much time to achieve the desired result — positional trading deals are closed months or years later.
• High responsibility for each forecast and analysis, since it can take many days and weeks for a trader to realize he’s been in the wrong trade.
• Slow progress in trading, which is not good when you want to gain trading experience.
• The need for significant capital investments (you can get a tangible income from position trading only if you have a large deposit in your account).

Do position traders make money?

Yes, it is possible when you know how trends work and manage to identify the right moments to enter the market. However, the major problem of position trading is that most of the time, the market is flat rather than trending. Hence, most of the time, traders have to wait for the asset cost to go in the right direction or take no position at all.

Is position trading risky?

Typically, position trading strategies are considered to be safer because the shorter the time frame, the greater the risk. Price fluctuations within a short time can be critical for intraday positions, while changes over the long term are easier to predict.

However, that does not mean position trading is not devoid of risks and dangers. The major threat is sudden price trend changing that may happen because of global events, issues with the company releasing the stock, or challenges faced by an entire industry.

Conclusion

At first glance, position trading seems to be easy. Indeed, it involves less fuss and stress and can be combined with a full-time job. However, it also requires knowledge of economics and how market trends work, fundamental and technical analysis, and a lot of patience.

It is recommended for traders who have more or less experience and possess enough capital to earn enough with 10-20% price changes.