Position trading explained
Position trading is a very popular trading strategy that allows individual traders to hold a position, for a long period of time, usually months or years. Position traders ignore the short-term price movements and prefer to rely on more precise analysis and long-term trends. This is in fact the type of trading that most closely resembles buy and hold investing, with one crucial difference: buy and hold investors can only take long positions.
Of all the types of trading, position trading is the one with the longest holding times. Consequently, the profit potential is greater, but so is the risk. History is full of famous examples of great traders who made their fortune by implementing position trading strategies.
For example, in one of his latest newsletters, Joe Ross spoke of what is surely the longest example of position trading on record, which lasted almost ten years (from 1991 to 2000). The investor in question opened a long-term position in the S&P 500, which he held for a long period of time, by setting a trailing stop that was triggered only when he felt that a good profit had been made, thus finally closing the position with a profit of 16 million dollars.
Another famous position trader was Philip A. Fisher who, in addition to being a great investor and being followed by a large crowd of admirers, including Warren Buffet, made excellent investments, focusing on good companies with very encouraging data. For example, in 1955 he made a long-term investment in Motorola shares and held that position until his death at the age of 96.
In what types of markets is position trading used?
Position trading is the trading strategy most similar to traditional investment. Position traders profit from long-term price movements and, consequently, are more interested in markets that have well-defined trends and narrow price ranges, rather than markets that experience high volatility and wider trading ranges.
Positional share trading
Position traders often trade company shares. As a general rule, asset classes, such as stocks, tend to follow more stable trends than volatile markets, such as cryptocurrencies and some forex markets. Despite the occurrence of certain events, such as market announcements or relevant news, fundamental analysis of the business model of an underlying company represents a solid base from where position traders can evaluate the true value of a company and consequently, select the best opportunities for them. They can negotiate based on where they think some companies, or even industrial sectors, will find themselves in a year from now.
Position trading on commodities
Like stocks, commodities are more closely connected to long-term trends than other markets, such as cryptocurrencies and currency pairs. This is not to say that raw materials are not volatile, Commodities can be volatile as well, but they tend to stabilize faster than other markets.
Position trading on indicies
Indices include large clusters of companies, grouped together based on the fact that they are all located in the same geographical area, country, or continent or that they belong to the same commercial chain. As a result, indices have more stable trends and are preferred by position traders.
Position trading on forex
Currency pairs, mostly because of their volatility, are generally less favoured by position traders.
Position trading on crypto
Despite being known for their volatility, cryptocurrencies, attract some position traders who implement buy and hold techniques for certain cryptocurrencies that are likely to grow in value.
Most popular position trading strategies
Position traders tend to use technical and fundamental analysis to evaluate potential price trends on the market. Here are some examples of position trading techniques:
Moving average over 50 days
The 50-day moving average indicator (MA) is an important technical indicator in position trading. The reason is that 50 is a factor of both 100 and 200, which have corresponding moving averages that are rather precise indicators of significant long-term trends.
Support and resistance trading
Support and resistance trading shows the direction in which the price of an asset is going, and therefore indicates to position traders whether it is better to open or close a position on a particular asset.
A stock support level refers to the price below which an asset has never historically fallen. Short-term support levels may occur, as well as historical support levels that persist for years. On the other hand, resistance level refers to the price threshold that a security seems historically unable to overcome. Position traders will use long- term resistance, for example, to decide when to close a position, relying on the expectation that the security would drop upon reaching this level. Likewise, position traders could buy at historic support levels if they believe a long-term upward trend will begin.
Trading breakouts
Trading breakouts can be useful for position traders, because they can provide significant information about the beginning of the next significant movement on the market. Traders who adopt this technique are attempting to open a position at the beginning of a trend.
Features of a position trader
The term position trader refers to a type of trader who holds investments for a long period of time. As already mentioned, positions can be held on average for months or even years. Position traders are less concerned with short-term fluctuations, unless they can impact the long-term outlook of their position, and are by definition trend followers. Usually, most position traders do not trade actively, and are surpassed by long term buy and hold investors in the length of the time they hold their positions.
Position traders usually use a combination of technical analysis and fundamental analysis when making decisions, but also take into considerations other factors such as market trends and historical patterns. Good position traders are those who can successfully identify the right entry and exit points and know when to place a stop-loss order.
Position trading vs swing trading
Despite being based on similar concept of trend following, position trading and swing trading differ in the length of the investment: in fact, position traders hold their position for a longer period of time than swing traders.
Position trading vs day trading
Position trading can be considered the polar opposite of day trading strategy, which mostly takes advantage of short term market fluctuations.
Advantages of position trading
Position trading has many advantages such as:
- It is a strategy that can lead to big gains
- Less stress for the trader, because positions don’t need to be checked on a daily basis
- More time to spend on other transactions or other professional activities. In fact, position trading only takes time when analysing the prospective stock.
Disadvantages of position trading
Like any other trading strategy, position trading has also some drawbacks:
- It is not for everyone, considering a big capital is needed to keep positions opened for a long period of time
- Operations can last for several months, meaning that the capital is locked in for a long time
- The need of large deposits: in fact, trading positions with minimal funds is unfeasible. Strong price fluctuations are likely to lead to a total loss of the invested capital
- Swap fees. If the position stays open for a long period, swaps can accumulate to a huge amount
- Risk. The risk involved in position trading is much lower than that daily trading or swing trading, but if a mistake is made, it will likely be fatal. If a trader goes against the trend, he will lose not only his deposit, but also the time he invested in, which is significant, considering that we are talking about a long period of time.
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Disclaimer
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.