Contents: Position trading
- What is a position in trading?
- What is position trading?
- Benefits and risks of position trading
- Understanding the role of market trends in position trading
- Best positional trading indicators
- How to establish your position trading plan
- Best markets to position trade
- Position trading in different market conditions
- Position trading vs swing trading vs day trading
- Do position traders make money?
- Factors influencing position trading success
- Is position trading risky?
- Mistakes to avoid in position trading
- Role of discipline and patience in position trading
- Examples of successful position trading
- How to practice position trading
What is taking a position in trading?
In financial markets, a position is ‘opened’ when a trader purchases a financial security with a buy order or when the trader sells short. That position is then ‘closed’ when the trader sells the asset that was purchased or covers the short sale. It is the concept of taking a position that gives position trading its name.
Let’s look at a quick example in the forex market.
Long position in the US dollar = Buy USD/CHF forex pair
Short position in the euro = Sell EUR/USD forex pair
Taking a position in the market is comparable to when somebody takes a position on a social issue. They form an opinion and stick with it. This is what position trading is, taking a position about whether a market for the next few weeks or months will be bullish, bearish or not worth trading.
What is position trading?
Position trading is a longer-term trading strategy where a trader purposefully sits in a position for several weeks or even months, waiting for a big price move.
This is a different trading philosophy to a day trader who aims to capture smaller movements by buying and selling within the same day.
The position trader rides out the short-term ups and downs of the market price, patiently waiting for their longer term price objective to be achieved or not. The premise behind position trading is the idea that the market trends. Position traders will initiate a trade to capture a long term price trend.
The simplest way to describe position trading is to say that the trader will set a big profit target in terms of percentage move of the market they are trading. At the same time, so as not to be prematurely knocked out of the position early, the position trader will tolerate larger losses by setting a bigger stop loss.
Benefits and risks of position trading
Position trading is a strategy where traders hold positions in securities for an extended period, often for months or years. This trading style can have several advantages and disadvantages, depending on the trader's financial goals and risk tolerance.
- Lower transaction costs: Since position traders make fewer trades over a longer period, they tend to incur lower transaction costs compared to day traders or swing traders.
- Less time-consuming: Position trading does not require constant monitoring of market fluctuations, making it less time-consuming than other trading methods.
- More potential for significant returns: Given the extended timeframe, position traders have the potential to realise substantial gains if their predictions about long-term trends are correct.
- Market volatility: Since position trading involves holding onto securities for an extended period, traders are exposed to the fluctuations and volatility of the market.
- Higher capital requirement: Position trading often requires a significant initial investment to withstand potential short-term losses.
- Liquidity risk: There is also the risk that a security might not be easily sold when the trader wants to exit their position.
Understanding the role of market trends in position trading
In position trading, understanding market trends is crucial. Traders make decisions based on the direction in which they anticipate the market will move over the long term. This can include both micro and macroeconomic trends, as well as company-specific trends.
Uptrends are periods where prices generally increase over time, creating a series of higher highs and higher lows. During this time, traders may choose to enter long positions, betting that the price will continue to rise.
Downtrends, on the other hand, are periods where prices generally decrease over time, leading to lower lows and lower highs. In such scenarios, traders may decide to enter short positions, predicting the price will continue to drop.
Best positional trading indicators
The indicators that work for trend following tend to be the same kinds of indicators that work for position trading. For example, when position trading it is important to have a way to judge whether the long term trend that will help you reach your profit target is on your side or has turned against you. It’s less important in position trading strategies (but very important in day trading strategies) to get perfect market timing.
Here are our top 3 indicators for position trading:
1) Simple Moving Averages: 50, 100, 200-day SMAs
Moving averages are a lagging indicator, meaning the price will move first and then the moving average will move afterwards, giving a trading signal. Position traders can use a moving average crossover as an entry signal or exit signal or use the price being above or below the moving average as a reason to be in or out of the position.
The 'moving average convergence divergence' (MACD) indicator is almost an alternative to moving averages for those who like to keep their candlestick charts or bar charts clean (naked trading!). MACD crossovers can be a signal to enter or exit trades. Whether the MACD indicator is above or below the zero line can be used as a reason to be in or out of the trend.
3) Support and Resistance
Previous highs and lows in the price as well as big figures like $.10 in forex markets or $100 numbers in stock indices like the S&P 500 make for natural beginning and end points for long term trends.
How to establish your position trading plan
A position trading plan is a strategic blueprint that guides a trader's decisions. It encompasses a trader's risk tolerance, financial goals, and preferred securities, among other factors. Here are some steps to create a position trading plan:
- Choose the right securities: Research and select securities that align with your financial objectives and risk tolerance. This could include stocks, forex pairs, or commodities.
- Identify long-term trends: Use fundamental and technical analysis to identify long-term trends that could impact the price of your chosen securities.
- Set your entry and exit points: Determine the price levels at which you will enter and exit your positions. Stick to these levels to manage your risk effectively.
- Monitor your plan: Regularly review your trading plan to ensure it aligns with current market conditions and your financial goals.
Best markets to position trade
Equities are probably the default market that most position traders will gravitate towards. This is because retail investors tend to want to see some results on their investment within a year but don’t have the spare time to be monitoring markets all day. Stocks lend themselves quite well to thematic investing, where for example an expected change in government policy might favour a certain company’s earnings for the next 6-12 months.
As a rule of thumb, forex traders tend to focus on shorter timeframes, either day trading or more active swing trading. Part of the reason for this is the overnight swap fee that forex traders must pay for holding a stock past around 5pm in New York. The other reason is that forex markets are very active, offering 24-hour trading opportunities and are constantly reacting to economic data and global events. This higher volatility lends itself to short-term trading. All that said, forex markets are prone to strong medium term trends so they provide frequent position trading opportunities too.
This is the favoured asset class for professional trending following fund managers known as CTAs. Commodities prices are driven by supply and demand for the commodity. There will be periods when this supply and demand is relatively stable, and then a catalyst like weather in the case of agricultural commodities or a mining strike in the case of metals will suddenly tip it out of balance, and create what can be a sustained market trend.
Because indices comprise a group of stocks, the price action tends to be more stable and responds to more macro issues than micro level issues like a CEO departing a company. If you want to take a position in the stock market - for example, you see that it is a bull market and you want to participate for the next few months - or perhaps you think a bear market is coming and you wish to go short the stock index. Both are valid ways to use index CFDs for position trading or hedging positions.
Position trading in different market conditions
The success of position trading can vary greatly depending on market conditions. Here's how position trading might play out in different situations:
Bull markets: In a bull market, prices are generally rising, and there is optimism about future gains. Position traders may take long positions, expecting the upward trend to continue.
Bear markets: In a bear market, prices are falling, and there is pessimism about the market's direction. Position traders may choose to short sell, betting that prices will continue to decrease. They might also decide to stay out of the market until conditions improve.
Flat or sideways markets: In a sideways market, prices move within a narrow range, with neither the bulls nor the bears taking control. Position traders may find it difficult to profit in such conditions, as there are no clear long-term trends to follow.
Position trading vs swing trading vs day trading
Let’s look at a price chart to understand the way a position trading strategy would be different from a swing trading strategy or day trading strategy.
Daily Candlestick chart of Apple (AAPL)
Source: Smart Swing Trade
The Position trader will aim to buy at the beginning of a multi-week price move
The Swing trader will try to capture the medium term multi-day ‘swings’ in the price
The Day trader is buying and selling within each candlestick on this chart.
The way each trading strategy is defined is by the holding period. But, the trade entry and exit techniques, technical indicators, risk management and trading psychology used for each trading methodology can differ greatly.
Do position traders make money?
“They say you never grow poor taking profits. No, you don't. But neither do you grow rich taking a four-point profit in a bull market.”
- Edwin Lefèvre, Reminiscences of a Stock Operator
It’s our second quote from the great trading book Reminiscences of a Stock Operator but you probably understand the relevance already.
When prices are trending strongly higher in a bull market or trending strongly lower in a bear market, taking a position to ride the trend makes sense. It makes less sense in this instance to jump in out of the bull market trying to take small pieces at a time, and likely missing parts of the trend and paying much more in brokerage fees.
The downside to position trading is that financial markets spend most of their time in a sideways range rather than in a trend. When it is a sideways market, it means the position trader must sit in trades that go nowhere and just move in and out of a profit and a loss - or simply take no position at all, and are inactive in the market.
Factors influencing position trading success
- Market analysis: Proficient understanding of market trends and indicators directly impacts the success of a position trader.
- Risk management: Successful position traders always have a risk management plan, knowing when to exit a position if the market goes against their prediction.
- Patience: As position trading involves holding onto securities for long periods, patience is crucial for waiting out market fluctuations.
Is position trading risky?
This is a different question to whether position trading is easy but as far as risk-taking, it’s a generally accepted idea among investors that the shorter the timeframe that you trade on, the greater the risk. That is because anything unexpected can happen in the short term, while changes in higher timeframes tend to take much longer, except in exceptional circumstances.
Strategy Example: Breakout, Fundamentals & SMA
The concept of this position trading strategy is to find a market or financial asset that is about to transition from a sideways market into a new trend into which it will be worth holding a position.
The three signals we use in this position trading system are:
- Price breakout
- News catalyst
- Moving average (exit)
With the benefit of hindsight we can see that the gold price broke out of a mult-week trading range in 2020 after rebounding off the lows brought about by the covid-19 pandemic. As the Federal Reserve signalled it would keep its inflationary money-printing QE policy in place, the price of gold had a breakout and went on a multi-week trend. Eventually the trend rolled over and the price of gold fell below the 50-day moving average.
Mistakes to avoid in position trading
Some common errors in position trading include lack of a trading plan, failure to consider market conditions, and impatience. For instance, traders who disregard the importance of a well-formulated trading plan may end up making impulsive decisions based on emotions rather than logical market analysis.
Role of discipline and patience in position trading
The success of position trading significantly depends on discipline and patience. Traders need to stick to their trading plan and avoid emotional decisions. Since position trading involves holding onto securities for an extended period, waiting out market fluctuations requires a high level of patience.
Examples of successful position trading
Well-known investors such as Warren Buffett and Charlie Munger are excellent examples of successful position trading. They typically buy and hold securities for many years, often seeing substantial returns on their investments.
How to practise position trading
Try a FlowBank demo trading account to practise position trading.