Trading Strategy 4 – Position Trading
Publish on 2021-12-30
Position trading is a long-term trading strategy where a trader holds a position in an asset for a long period of time, typically over several months or years to profit from large price movements or longer-term trends.
Position trading is a trading style similar to the Buy-and-Hold trading. The key difference between the two is that buy-and-hold traders only hold long positions, while position traders can hold both long and short positions at the same time.
Theoretical Basis of Position Trading
Traders who adopt position trading strategies are called position traders. They pay more attention to market trends, without worrying about the short-term price retracement and fluctuations. Once position traders identify the timing of entry, they will start trading immediately. They take almost no action during the entire holding period except for monitoring their positions when there is a significant market change. Position traders tend to profit from large market movements and major trends. Generally, they are financially strong, boasting sophisticated investment experience and utilize reliable sources of information. They do not engage in short-term trading unless they encounter extreme market risks.
Features of Position Trading
1. A long-term trading strategy where traders can hold both long and short positions
2. Position traders can hold their positions over several months or years
3. Position traders ignore short-term price movements in favor of pinpointing and profiting from longer-term trends
4. Position traders tend to utilize fundamentals and technical analysis to evaluate market trends
Pros of Position Trading
1. Limited maintenance of positions. As position traders focus on the medium and long-term price movements, they perform limited maintenance for their positions. They will often pre-analyze the market before trading. Once they identify the timing of entry, they start trading immediately. No additional effort is required for them to maintain the positions unless a huge market reversal occurs.
2. Lower trading costs due to low trading frequency. If the market trend lives up to the expectation of position traders, they will make few trades during the holding period. A few of them will exit the market unless there are huge price fluctuations. Therefore, position traders perform fewer trades during their holding period, which helps effectively reduce their trading costs.
3. Capitalize on more substantial trends, dampen the “noise” of the market, higher profitability per single trade. Position traders pay attention to the longer-term price trends of assets, rather than short-term price movements, which, therefore, helps dampen the “noise” of the market. Position traders tend to focus on the long-term and intrinsic value of the assets instead of speculating on the short-term price fluctuations. Once they confirm a long-term trend, they will hold with patience until they identify an ideal profit opportunity. Position traders can capture large profits from a single trade.
Cons of Position Trading
1. As position traders hold their positions over several months or years, they need to invest a large amount of capital to maintain the long-term holding of the positions, which means the capital will be locked up, leading to low capital utilization and liquidity.
2. It’s impossible for position traders to earn profits by investing small sums of money, because they may encounter strong price fluctuations during the long holding period and they could possibly lose their entire investment if they don’t have enough capital to help them survive highly volatile markets.
3. Position traders must face potential holding risks, as they may accumulate huge holding costs over long time periods, such as swap charges utilized in forex markets.
4. Although position trading carries lower risks than day trading and range trading, an unexpected trend reversal in asset prices can result in substantial economic losses for position traders.
Commonly Used Indicators in Position Trading
Position traders who focus on long-term price movements tend to utilize fundamentals and technical analysis to evaluate market trends. When identifying trading opportunities, they are more concerned about macroeconomic data such as inflation, unemployment rate and other indicators that can affect asset prices for a long time. They will usually use the indicators shown below for technical analysis:
1. The 50-day Moving Average
The 50-day moving average is an important technical indicator for position traders, because it can affect the moving trend of the 100-day and 200-day moving averages and reflect a more obvious long-term trend. When the 50-day moving average intersects with the 100-day and 200-day moving averages, it usually signals a new long-term trend, which can help traders identify trading opportunities.
2. Support and Resistance Levels
Support and resistance levels can reflect the change direction of asset prices and provide signals for traders to enter and exit the market. For example, position traders can close their positions at the long-term resistance level, where asset prices will fall sharply; similarly, traders can buy at the historical support level if they see a long-term trend.
A breakout is a signal that there will be a significant market reversal. Traders can utilize the indicator to open a position in the early phase of the trend.