U.S. Dollar / Japanese YenEducation
What Is Position Trading? Definition and Examples
If you’re interested in trading but don’t have the time to day trade, position trading might be for you. In this guide, we’ll dive into the topic, answering the question, “what is position trading?” and providing some examples so you can develop your own strategy.
Position Trading Definition
To start, we need to define position trading. Position trading involves holding a trade for weeks, months, or even years to profit from a long-term price trend. Unlike day trading, which involves opening and closing positions within the same trading day, position trading requires a broader perspective and a more patient approach.
There are similarities between swing trading and position trading, but it’s important to be aware of a few key distinctions. Swing traders also stay in positions for weeks or sometimes months, but they’re more concerned with capturing a move from one key technical area to another.
As such, you may find swing traders that open and close a position over several days. In contrast, position traders are effectively trend-followers and look to capitalise on long-term trends until they reverse.
Many trends in forex pairs, stocks, commodities, and other markets are driven by fundamental factors. Consequently, position traders emphasise macroeconomic and fundamental analysis more than short-term traders.
Components of a Position Trader’s Strategy
While position trading strategies are often unique to the individual trader, there are some commonalities between most positional traders.
Fundamental Analysis
As mentioned, position traders use fundamental analysis to guide their decision-making. This may involve analysing a company’s financial statements, examining interest rate differentials between two economies, and assessing the overall economic picture to determine the potential for an asset’s long-term growth or decline.
Technical Analysis
Technical analysis still plays a crucial role in a positional trader’s strategy. Technical analysis tools, like moving averages or oscillators, can help gauge the strength of a trend or provide insight into when a trend is reaching its peak. Other forms of technical analysis, like Fibonacci retracements and chart patterns, can help a position trader identify optimal entries.
High Timeframe Charts
As position traders hold trades for an extended period, they tend to look to the daily, weekly, and monthly charts to guide their trades. They may pay attention to lower timeframes, especially if looking for an entry, but their priority will be the higher timeframe charts.
At FXOpen, we understand that you need the flexibility to assess the markets across many timeframes. That's why we offer charts ranging from 1-minute to monthly in our free TickTrader terminal, making it an ideal platform for position trading and more.
Risk Management
Risk management is an essential aspect of position trading. As a natural consequence of taking a long-term view of the market, position traders often use stop losses far wider than a day or swing trader to account for more significant price fluctuations. Some position traders also hedge their trades to mitigate their risk exposure further.
Patience
Lastly, position trading requires the patience and discipline to hold a trade through short-term market volatility and avoid impulsive decision-making. Usually, a position trader will create a clear plan of how and when they want to exit to keep themselves accountable.
Advantages of Position Trading
- Time Commitment: Positional trading is less active than other strategies, making it a suitable option for traders with other time commitments.
- Reduced Market Noise: By taking a long-term approach and focusing on fundamentals, position traders can avoid the volatility and unpredictability of short-term trading styles.
- Lower Costs: Position trading also has reduced transaction costs, as traders make fewer trades in a given year. This can result in lower commissions, fees, and taxes.
Disadvantages of Position Trading
- Opportunity Cost: Position traders hold trades for a long time, so they may miss out on short-term trading opportunities that can result in quick profits.
- Higher Capital Requirements: Position trading often requires more capital investment than short-term trading styles to make the trade worthwhile, given that the stop losses are usually wider.
- Emotional Control: Position traders need strong emotional control and discipline to avoid making impulsive decisions based on short-term market movements or emotions. This can be challenging for some traders, leading to losses or missed opportunities.
Position Trading Examples
Let’s look at two position trading examples in the forex and indices markets.
USD/JPY
Following runaway inflation in the US, the Federal Reserve began hiking interest rates in March 2022, pushing them to 0.5% after the constant 0.25% rate since March 2020. Meanwhile, Japan had relatively low inflation, and the Bank of Japan committed to its dovish interest rate stance. As a result, demand for the US dollar picked up and simultaneously dropped for the Japanese yen.
While USD/JPY had been in an uptrend since the start of 2021, the Federal Reserve’s interest rate decision in March and the following hikes kickstarted a strong bullish trend in the pair. Position traders could have used this interest rate differential to identify that USD/JPY would likely continue trending upwards and enter a long position to profit from the appreciating dollar and weakening yen. They could have used a simple trailing stop below key swing points, exiting when the trend reversed.
Nasdaq 100
Similarly, the hawkish stance of the Fed led to a tumble across many US-based indices, but it particularly hurt the tech-focused Nasdaq 100. Tech companies are growth-focused and rely heavily on financing to achieve their goals. When interest rates rise, the cost of borrowing increases, resulting in restricted growth and reduced valuations.
High inflation preceding the first interest rate hike had already prompted expectations of higher interest rates, leading to a fall in the Nasdaq 100 prior to the first hike. However, subsequent hikes led the index to around -30% from the end of March 2022 to November 2022.
Anticipating that interest rates would continue to climb higher, a position trader might have used this expectation to their advantage, taking a short position as the market pulled back after the first decision. As with the USD/JPY example, a trailing stop here would have worked excellently.
Embark on Your Position Trading Journey With FXOpen
Now that you have a solid overview of what position trading is and how it works, you can put your knowledge into practice. After backtesting a few position trading setups, you may want to open an FXOpen account. With dozens of markets to pick from and the powerful TickTrader platform, you can start your position trading journey with confidence.
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
Position Trading Definition
To start, we need to define position trading. Position trading involves holding a trade for weeks, months, or even years to profit from a long-term price trend. Unlike day trading, which involves opening and closing positions within the same trading day, position trading requires a broader perspective and a more patient approach.
There are similarities between swing trading and position trading, but it’s important to be aware of a few key distinctions. Swing traders also stay in positions for weeks or sometimes months, but they’re more concerned with capturing a move from one key technical area to another.
As such, you may find swing traders that open and close a position over several days. In contrast, position traders are effectively trend-followers and look to capitalise on long-term trends until they reverse.
Many trends in forex pairs, stocks, commodities, and other markets are driven by fundamental factors. Consequently, position traders emphasise macroeconomic and fundamental analysis more than short-term traders.
Components of a Position Trader’s Strategy
While position trading strategies are often unique to the individual trader, there are some commonalities between most positional traders.
Fundamental Analysis
As mentioned, position traders use fundamental analysis to guide their decision-making. This may involve analysing a company’s financial statements, examining interest rate differentials between two economies, and assessing the overall economic picture to determine the potential for an asset’s long-term growth or decline.
Technical Analysis
Technical analysis still plays a crucial role in a positional trader’s strategy. Technical analysis tools, like moving averages or oscillators, can help gauge the strength of a trend or provide insight into when a trend is reaching its peak. Other forms of technical analysis, like Fibonacci retracements and chart patterns, can help a position trader identify optimal entries.
High Timeframe Charts
As position traders hold trades for an extended period, they tend to look to the daily, weekly, and monthly charts to guide their trades. They may pay attention to lower timeframes, especially if looking for an entry, but their priority will be the higher timeframe charts.
At FXOpen, we understand that you need the flexibility to assess the markets across many timeframes. That's why we offer charts ranging from 1-minute to monthly in our free TickTrader terminal, making it an ideal platform for position trading and more.
Risk Management
Risk management is an essential aspect of position trading. As a natural consequence of taking a long-term view of the market, position traders often use stop losses far wider than a day or swing trader to account for more significant price fluctuations. Some position traders also hedge their trades to mitigate their risk exposure further.
Patience
Lastly, position trading requires the patience and discipline to hold a trade through short-term market volatility and avoid impulsive decision-making. Usually, a position trader will create a clear plan of how and when they want to exit to keep themselves accountable.
Advantages of Position Trading
- Time Commitment: Positional trading is less active than other strategies, making it a suitable option for traders with other time commitments.
- Reduced Market Noise: By taking a long-term approach and focusing on fundamentals, position traders can avoid the volatility and unpredictability of short-term trading styles.
- Lower Costs: Position trading also has reduced transaction costs, as traders make fewer trades in a given year. This can result in lower commissions, fees, and taxes.
Disadvantages of Position Trading
- Opportunity Cost: Position traders hold trades for a long time, so they may miss out on short-term trading opportunities that can result in quick profits.
- Higher Capital Requirements: Position trading often requires more capital investment than short-term trading styles to make the trade worthwhile, given that the stop losses are usually wider.
- Emotional Control: Position traders need strong emotional control and discipline to avoid making impulsive decisions based on short-term market movements or emotions. This can be challenging for some traders, leading to losses or missed opportunities.
Position Trading Examples
Let’s look at two position trading examples in the forex and indices markets.
USD/JPY
Following runaway inflation in the US, the Federal Reserve began hiking interest rates in March 2022, pushing them to 0.5% after the constant 0.25% rate since March 2020. Meanwhile, Japan had relatively low inflation, and the Bank of Japan committed to its dovish interest rate stance. As a result, demand for the US dollar picked up and simultaneously dropped for the Japanese yen.
While USD/JPY had been in an uptrend since the start of 2021, the Federal Reserve’s interest rate decision in March and the following hikes kickstarted a strong bullish trend in the pair. Position traders could have used this interest rate differential to identify that USD/JPY would likely continue trending upwards and enter a long position to profit from the appreciating dollar and weakening yen. They could have used a simple trailing stop below key swing points, exiting when the trend reversed.
Nasdaq 100
Similarly, the hawkish stance of the Fed led to a tumble across many US-based indices, but it particularly hurt the tech-focused Nasdaq 100. Tech companies are growth-focused and rely heavily on financing to achieve their goals. When interest rates rise, the cost of borrowing increases, resulting in restricted growth and reduced valuations.
High inflation preceding the first interest rate hike had already prompted expectations of higher interest rates, leading to a fall in the Nasdaq 100 prior to the first hike. However, subsequent hikes led the index to around -30% from the end of March 2022 to November 2022.
Anticipating that interest rates would continue to climb higher, a position trader might have used this expectation to their advantage, taking a short position as the market pulled back after the first decision. As with the USD/JPY example, a trailing stop here would have worked excellently.
Embark on Your Position Trading Journey With FXOpen
Now that you have a solid overview of what position trading is and how it works, you can put your knowledge into practice. After backtesting a few position trading setups, you may want to open an FXOpen account. With dozens of markets to pick from and the powerful TickTrader platform, you can start your position trading journey with confidence.
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.
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