What is Position Trading? | Positional vs Swing vs Investing Strategy

Position trading is a great alternative way to trade the markets without committing the same amount of screen time involved in day trading. How does position trading work?

“That is about all I have learned—to study general conditions, to take a position and stick to it.”

- Edwin Lefèvre, Reminiscences of a Stock Operator

Position trading explanation

  • What is a position in trading?
  • What is position trading?
  • What’s good about position trading?
  • Best positional trading indicators
  • Best markets to position trade
  • Forex, commodity futures, index CFDs, stocks
  • Position trading vs swing trading
  • Position trading vs day trading
  • Do position traders make money?
  • A position trading strategy for beginners

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.

 

position-trading-egSource: SRTrader.com

 

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.

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.

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)

swing-trading-vs-position-tradingSource: 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.

 

trading strategies

 

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.

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.

2) MACD

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. 

Best markets to position trade

Stocks

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.

Forex

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.

Commodity futures

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.

Index CFDs

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 postions.

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 risks

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)

 

For example:

gold chart 2020

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.

How to practise postion trading

Try a FlowBank demo trading account to practise position trading.

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