Position Trading Strategy: Meaning, How to use and Examples

Position trading is when traders hold securities for prolonged periods, often for months or years, to capitalize on broad market trends This provides them with an alternative to the intensive screen time needed when day trading. Success depends on identifying and following these trends, informed by market conditions and various influencing factors.

Whereas the position trader will try and purchase securities at the onset of a prolonged multi-week price trend, the swing trader will try and capture the medium-term fluctuations, or ‘swings’, in prices over several days. On the other hand, the day trader will focus on buying and selling assets within a day and will avoid keeping positions overnight.

Su estilo de trading	Timeframe	Holding period
Position trading	Long term	Months to years
Swing trading	Short term	Days to weeks
Day trading	Short term	Only within a day
Scalp trading	Very short term	Seconds to minutes

Creating and developing a good position trading plan is key to manage risk. Apart from having a solid strategy, traders must avoid common errors to limit their losses. Patience and discipline are very important, and traders need to wait for the best entry and exit points, and resist impulsive decisions driven by short-term market fluctuations.

While position trading demands a deep understanding of market dynamics and considerable patience, it can help traders make substantial profits if they remain committed to a long-term approach.

Pros and Cons of Position Trading

Position trading, a strategy which involves holding onto assets for prolonged periods like months or years, can provide traders with lots of opportunities for making profits. Risks are always present however, and traders need to have a strong plan and follow risk management techniques to hedge against unpredictable market moves.

Pros

• Reduced transaction costs: Position traders execute fewer trades over bigger periods, which results in lower transaction costs when compared to day traders or swing traders.
• Time: Position trading demands less monitoring of the market and potential fluctuations, making it less time-intensive than other trading approaches.
• Potential for significant returns: Having a longer timeframe, position traders have the potential to make substantial profits if the market moves as expected.

Risks:

• Market volatility: Holding onto assets for an extended period may expose position traders to volatility.
• Liquidity risk: There’s a possibility that a security may not be immediately sellable when the trader wants to exit their position.
• Higher capital requirement: Position trading often requires a bigger initial investment to be able to deal with any short-term losses that may occur.

Understanding market trends in position trading

In position trading, knowing how market trends work is important. Traders base their decisions on the expectation of potential long-term market movements, taking into consideration micro and macroeconomic data and releases as well as company-specific trends.

Uptrends refer to periods when prices rise over time, characterised by higher highs and higher lows. Traders may choose to open long positions during such periods in anticipation of further price increases.

Conversely, downtrends signify periods of decreasing prices over time, featuring lower lows and lower highs. In such cases, traders may open short positions, expecting further price declines.

Positional trading strategies

1. Breakout trading strategy

A breakout system is the ability of a market to move to a new high or low and shows the potential for a continued trend in the direction of the breakout.

2. Moving Average (MA) trading

The moving average for a specific day is equal to the average of that day’s closing price and the closing prices on the former N − 1 day, where N is equivalent to the number of days in the moving average. With the moving average being dependent on prices from the past, when the market rises the moving average will be lower than the price, while in a decreasing market, the moving average will be above the price.

Thus, when a price trend changes from up to down, prices will cross the moving average from above. When the trend changes from down to up, prices must cross the moving average from below.

Position trading examples

Example 1

If there was an OPEC meeting where it was announced that oil production would be reduced in the coming months, then the price of oil would rise due to limited supply. With this news in mind, a position trader would take a long position on oil futures or oil company stocks, and they will exit the trade when the news changes the oil outlook.

Example 2

Another example from the steel industry is when steel prices rose after Chinese polluting steel plants closed. This affected global steel supply with steel prices rising significantly. On this occasion, a positional trader would have taken a position in steel stocks outside China, and, because this was a trending story for a year, this positional trade would have made some good gains.

What are the best instruments for position trading?

Most position traders focus on stocks, indices, or commodities because they tend to be more aligned with longer-term trends. While position trading can be applied to other instruments, specific markets are more suited for this type of strategy.

Is position trading viable for stocks?

Position trading is the most popular trading strategy among stock traders because it is the closest to investing. Stocks often demonstrate prolonged trends, with occasional volatility caused by events like news releases or earnings reports. Despite short-term volatility, a company’s value is fundamentally established and allows positioning traders to analyze earnings, management, and sector developments to form longer-term views that can be valid for months or even years.

Is position trading suitable for indices?

Indices combine groups of stocks categorized by factors like market capitalization or geographical location and mirror individual stocks’ fittingness for position trading. They exhibit less volatility than other markets and feature longer-term trends, making it easier for traders to identify trends.

Can commodities be traded using a position trading strategy?

Yes, of course. Commodities are linked to economic conditions and tend to respond well to big trends. A country’s economic growth could push demand for natural resources higher, while recessions and slower growth could weigh on demand. Position traders can monitor these changes by following and keeping themselves updated with macroeconomic indicators and industry-specific news to determine future moves.

Is position trading ideal for position traders?

Forex markets are less popular with position traders due to their volatility, which tends to attract shorter-term traders such as scalpers.

Is position trading right for me?

Position trading might be the right trading style for you if you’re patient and disciplined and do not seek the excitement of short-term moves and volatility that markets such as Forex may offer. Like with any other form of trading, you should be able to take risks and manage risk carefully. If you have a busy lifestyle and you cannot possibly sit in front of your screen for hours, then position trading may be better suited for you.

Additionally, if you are the kind of trader who seeks longer-term trends and is more interested in trading over longer periods without intense volatility, then position trading is for you.

Exención de responsabilidad:
Esta información no se considera asesoramiento ni recomendación para invertir, sino que es una comunicación de marketing