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.
Position trading is a long-term approach that involves keeping trades open for significant lengths of time in an attempt to benefit from larger price movements.
It involves ignoring short-term fluctuations in the expectation that markets will eventually align with your strategy. In the cryptocurrency sphere, a similar approach is referred to as hodling.
Position traders may keep trades open for many months or even years. 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.
Trailing stop orders are favoured among position traders as they allow for a trade to stay open while it remains 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 take a long ('buy') position if you expect an asset's price to rise while, if you believe that a market has become overvalued and is due to fall in price, you can opt for a short ('sell') position.
Find out more about CFDs in our in-depth guide.
Let's say that you want to open a long position on the GBP/USD currency pair and it is being quoted at 1.19345 / 1.19360.
You want to buy into a trade worth £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).
You can apply the principles of position trading to just about any of the underlying assets that we have available to trade at Tradu.
Position traders typically utilise elements of both technical and fundamental analysis to build these long-term strategies.
Determining the support and resistance levels of an asset's price involves charting its historical fluctuations.
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.
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.
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, this tends to be about filtering through more fundamental aspects. 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.
Take your position and stick to it. 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.
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.
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.
This method relies on a similar technical analysis used to determine an asset's resistance level but involves holding a long position.
Rather than predicting that an asset will start to fall in value, you are instead anticipating it to experience a 'breakout' and move through its previous high price point.
Being able to spot the burgeoning trend as early as possible is key to the success of this approach. 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.
If you're new to these markets, it's advisable to opt for one style of trading at the start. Once that has been mastered, you may find it easier to diversify your approach.
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).
Swing trading is another short-term discipline that generally sees traders take larger positions in an attempt to profit from smaller market movements. While position trading typically involves placing infrequent trades, swing traders are commonly more active.
There are similarities between these two, notably that they are usually longer-term options. 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.
There are certainly some similarities between position trading and holding stocks and shares for long-term periods. 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.
If you believe that you've spotted a long-term trend which could turn a profit, it's simple to put your position trading skills to the test with Tradu.
How to build a trading plan Trading strategies How does trading work? Day trading Trend trading Swing trading