Position (or positional) trading is a longer-term form of trading where orders are held open for weeks or months at a time. Calmer than swing trading and day trading, yet faster paced than investing for years and decades via savings accounts, it is often chosen by traders who want quick exposure to the markets, don't want to regularly check their stocks, and want to trade on long-term fundamental and technical analysis.
Whether you choose to position trade on forex, stocks, commodities or indices, doing so without a strategy can reduce your effectiveness. To keep your eye on the prize, reduce risk, and more, you need a position trading strategy informed by the right indicators. Read on to learn some of the best positional trading strategies and indicators available and find out how to create your own.
Position trading strategies are ways traders improve their accuracy and profitability. They can be based on a certain mode of thought, or on indictors - technical trading data trends which can signify when to open or close a position. By having a strategy in place, you can:
All of these are significant benefits. But before you create a position strategy, you must understand the ins and outs of position trading. New to this type of trade? Learn more in our beginner's guide below.
Want to get more from your indices, stock, crypto or commodities trading? With the position strategies and key indicators below, you'll be able to better understand and take advantage of the markets. As with any strategy, though, always do plenty of research and make sure you understand how it works before risking your capital.
Due to the medium-to-long-term nature of position trading, identifying periods where prices escape (break out) from their long-term support (lowest price) and resistance (highest price) levels is crucial to making significant profits.
To do this, you can identify securities which are beginning to break out of their historic levels of support and resistance.
Pairing this with fundamental analysis, you can understand why the price movement is occurring. If your analysis signifies a longer-term divergence with the support-resistance level, you may wish to open a position to capitalise on the price movement (long if resistance is breached, short if the support level is).
When the price of an asset is rising, it will often experience pullbacks. These happen when investors engage in profit-taking activity despite the asset's positive fundamentals. The price then performs a retracement, continuing back up higher on its original trend line.
By identifying when these pullbacks are occurring, you can buy the dip without having to wait weeks or months for the price of the security to enter and exit a full-blown reversal. To understand when is best, use trend lines to work out whether the price drop has gone below the support level, or do the same using moving average indicators. When they cross, a reversal is more likely.
This position trading strategy involves looking at long-term economic, social and political trends to identify the direction of travel for whatever is likely to impact the price of your security.
This approach is good for position traders as it allows them to bring all their qualitative trading skills and knowledge to bear. As an example, you might read several government plans regarding the legalisation of driverless cars – if they are consistently positive, you might invest in a company that provides these technologies or one of their key suppliers.
When identifying long-term trends in price range, this is a strategy position traders can use to work out when an asset is entering oversold territory.
Here, you would be looking for prices which have been rising for a while but have gone further, escaping their long-term resistance levels. Combine this with fundamental analysis to find events and news which might signify a long-term reduction in price. If everything adds up, once the price rise begins to tail off and reverse, a sell order could be placed.
As well as the indicators and strategies and indicators above, when position trading, it's important to understand your priorities and the likely behaviour of the market over the long term. You can do just that with the following five tips:
1. Understand your asset: Due to the long-term nature of position trades, you must have a strong knowledge of the assets you're working with. With stocks, for instance, understand the underlying financials of the company, their prospects compared to the wider economic context, and potential pitfalls in the upcoming economic news cycle.
2. Only trade with funds you can afford to lose: Since position trades use large amounts of capital compared to shorter-term trading methods, it's important you open positions with money that you don't rely on. Long-term trades can be risky, and your capital could be lost.
3. Set rules: Loss, profit, time in market: all three need to be set before you open a position. Each is dictated by your attitude to risk and broader profit goals, though a good ratio for profit-stop and stop-loss orders is 3:1. Time in market is entirely up to you and your research – position trades typically run from a week to multiple months, depending on the asset and fundamentals.
4. Understand the market: If your chosen asset has been ambling along within a level range for a particularly long period or dropping precipitously for weeks, it might not be the best choice for your position trading strategy. A good rule of thumb is that positional trades work best in strong bear markets.
5. Keep emotions at bay: When trading over such a long period, you may feel the urge to regularly check your trades. Try not to, as the more you check, the greater the likelihood of succumbing to fear or greed. The result? You go against your pre-set trading rules and damage your profits.
Effective, iron-handed position trading starts with strategy. With the indicators, approaches and tips above, you should have everything you need to get started in the markets with Tradu.
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