What Is Position Trading & How Does It Work?
Position trading is a popular approach among traders. It presents the opportunity to make a profit over a long time span, although the risk is that losses can be amplified too.
Read on to find out more about this method of trading, as well as some strategies that you could implement in future trades that you make.
What is position trading?
Position trading is a type of trading that involves keeping trades open for significant lengths of time to benefit from larger price movements.
Position traders hold a position for extended periods, ignoring short-term market fluctuations in the expectation that markets will align with their strategy.
Position traders may hold trades open for a long period of time, spanning months or even years, to capture significant price movements. While this can increase profits if markets consistently move in your favour, it can also up the risk if they go in the opposite direction and never recover.
A stop-loss order, particularly trailing stops, is favoured by position traders to keep trades open while they remain profitable. This prevents a long-term trade from being closed before its full potential has been reached.
Through derivative products such as CFDs, position traders can take either position on a market. You can open a long position if you expect an asset's price to rise, or opt for a short ('sell') position if you believe a market is overvalued and due to fall in price.
Find out more about CFDs in our in-depth guide.
Example of forex position trading for beginners
Suppose you want to open a position on the GBP/USD currency pair, quoted at 1.19345 / 1.19360, for a long-term trade.
You want to buy into a trade with a position size of £10,000. If GBP/USD has a margin rate of 3.33%, your margin required to enter the trade would be £397.47 – 3.33% x (10,000 x 1.19360).
Events such as the pound's notorious slump amid the September 2022 mini-budget come and go, but you keep your trade open. In six months, the pair's price has risen to 1.21045 / 1.21060, so you close the trade at the sell price of 1.21045.
The market has moved a substantial 1,685 points (1.21045 to 1.19360) in your favour over that time.
Your profit would be £168.50 – (£10,000 x 1.21045) - (£10,000 x 1.19360).
What markets can I position trade on?
You can apply the principles of position trading to just about any of the underlying assets that we have available to trade at Tradu.
- Shares: Think that you've spotted a company offering the next big thing? If it turns out to be a hit with customers, you could be onto something.
- Forex: By staying informed on current affairs and political events, you can identify long-term market trends in volatile forex markets for position trading.
- Indices: A long-term outlook on big businesses booming makes indices ideal for position trading. Long-term trades on a stock index might interest you.
- Commodities: Commodity markets exhibit market volatility, which increases risk exposure but also offers long-term opportunities as prices stabilize.
Position trading indicators
Position traders combine technical and fundamental analysis to develop a robust investment strategy for long-term success.
Support and resistance
Determining the support and resistance levels of an asset's price involves charting its historical fluctuations.
- Support: A price below which you would not expect an asset to fall.
- Resistance: A historical peak above which prices don't rise.
Simple moving average (SMA)
The simple moving average of an asset generally refers to its closing prices averaged out over many days and displayed as a line on a pricing chart. A typically used timeframe is a 50-day SMA.
You can easily view the SMA of assets on their pricing charts at the click of a button on the Tradu platform.
Fibonacci retracement
An expansion on support and resistance levels that is a popular method of technical analysis. With horizontal lines drawn across a chart at 0% and 100% – typically at the points previously highlighted as support and resistance levels – further layers are placed at 23.6%, 38.2%, 61.8%, and 78.6%. 50% is also commonly marked.
These levels now present additional support and resistance indicators on which to base strategies.
Current events and business updates
SMA, support and resistance help position traders to decide their buying or selling point of an asset. What about choosing the asset in the first place, though?
For a long-term position, understanding market sentiment through fundamental aspects, like major product releases, is crucial. For example, if Apple is about to release its latest iteration of the iPhone, this may prompt a position trader to examine where prices are.
If they're sitting around support or resistance levels, it may be time to make a trade.
Position trading strategies
Effective position trading requires careful planning of entry and exit points to maximize profits and minimize risks. Simple? Well, not quite. There's plenty about which to think when position trading, especially around when you enter and exit your trade.
Get to grips with a wide range of trading strategies in our guide.
Range trading
This involves using the previously established support and resistance levels to guide your strategy. The space between those two points is typically referred to as the range. Identifying precise entry and exit points within this range is critical for successful range-based position trading.
If an asset is approaching its support level, you may expect it to start gaining value soon and set a long position trading strategy.
Short position trading would come into play if you noticed an asset at its resistance level and did not expect further gains.
Breakout trading
This method relies on a similar technical analysis used to determine an asset's resistance level but involves holding a long position.
Instead of predicting a decline, you anticipate market moves that lead to a breakout, pushing the asset past its previous high.
Spotting the trend early is critical for a successful position in breakout trading. Because assets that enter uncharted pricing territory often experience some form of regression, having a clear idea of when to get out is also vital.
The opposite of breakout trading – holding a short position in anticipation of an asset's value falling through its support level – is referred to as breakdown trading.
Advantages of position trading
- Profits accrued over a long period can be magnified by leverage if market movements consistently align with your position.
- Less requirement to constantly monitor movements may benefit traders interested in part-time involvement and also offers more opportunity to analyse changes to the market.
- Anomalous events and price changes have minimal impact on your strategy if market conditions stabilize.
Disadvantages of position trading
- Relies heavily on pre-trade analysis. A failure to read conditions correctly could result in a quick and irretrievable loss of capital.
- Position trading with leverage can turn a long-term strategy into a short-term failure if the value of the underlying asset drops significantly and sharply.
- Ignoring minor fluctuations is part of the principle but, if they turn out to be the start of a trend reversal, it's easy to miss out on optimal times to exit a trade.
- Funds are locked in long-term, potentially limiting manoeuvrability across your portfolio, while overnight fees can also eat into your capital.
What other trading disciplines can I use?
If you're new to trading, it’s wise to focus on one of the many trading styles, like position trading, to build your skills. Once that has been mastered, you may find it easier to diversify your approach.
Position trading vs day trading
Position trading and day trading are essentially opposite disciplines. Whereas position trading relies on long-term movements, day trading involves opening and closing positions in a single trading session (one day).
Position trading vs swing trading
Position trading and swing trading differ significantly, with swing trading being a short-term discipline where traders take larger positions to profit from smaller market movements. While position trading focuses on long-term gains, swing traders are more active in the short-term market, capitalizing on smaller price movements.
Position trading vs trend trading
There are similarities between these two, notably that both involve holding positions during periods of market stability or change over the long term. However, while position trading involves riding out periods of adverse market movements in search of greater returns, trend traders will often use this as their cue to close a trade.
Is position trading the same as long-term investing?
Position trading shares similarities with choosing to invest in a buy and hold strategy for months or years, but allows for both long and short positions. However, the latter means that you are always taking a long position, while position trading also enables you to go short if you believe that a market's value is set to fall.
How to start position trading with Tradu
If you’re the type of trader who spots long-term trends, position trading with Tradu makes it simple to test your skills.
- Sign up: You can open a trading account with us in minutes.
- Use our resources: It's important to learn the ropes before you get started. Our market, trading and platform guides have bags of useful information.
- Choose your market: Pick from a wide range of assets and financial instruments to trade.
- Pick your strategy: Utilising fundamental and technical analysis, choose your position and plan your trade.
- Execute your first trade: Our intuitive trading platform enables you to execute position trades quickly and efficiently. When it's time to close your position, you can do so quickly or take advantage of our automatic orders.
- Diversify your portfolio: With a Tradu account, it's easy to trade listed stocks and CFDs on stocks, forex, indices and commodities, so you can build a well-diversified trading portfolio from one place.
How to build a trading plan
Trading strategies
How does trading work?
Day trading
Trend trading
Swing trading