Whether you are new to the Forex market or an expert who has been in the market for a long time, you would have come across the terminology of position trading, or you would have known someone who is a position trader.
No matter who you are and whether or not you are familiar with the complete essence of this trading strategy, if you are wondering “What is Positional trading” and whether or not this slow-paced long-term investment strategy is the right fit for you, then you need not worry as we are going to provide you an in-depth analysis of position trading which will help you to decide whether you should go for it or not.
So without much ado, let’s find out what positional trading is, but before that, let’s take a quick sneak peek at taking a position in Forex trading.
What is meant by taking a position in Forex trading?
An individual or business that owns a certain quantity of a currency and is exposed to that currency’s swings versus other currencies is said to be in a forex position. It is a trade that has been entered into to profit from a currency’s price movement. People can take two main types of positions in this market: long and short. Your position determines how you profit from a currency’s price movement.
A short position is when a trader sells an asset and then buys it again to make a profit when the price falls. Conversely, a long position is when a trader buys an asset to make a profit when the price rises.
To take a position in trading, traders must have the knowledge and experience to make informed decisions about their investments. They also need to be able to analyze market trends and make predictions about future prices. These skills are what separate traders from traders. A trader’s job is not easy as it requires understanding how markets work. It also requires someone who can constantly adapt their strategies as markets change over time.
So what it means to a trader to take a position is that they will hold a particular stance as to whether the market will be bullish, bearish, or neutral.
What is Open Position in Trading?
A deal that is still in an open position has the potential to make or lose money. On the other hand, when a position is closed, the trade is not active now; at this point, all gains and losses have already been recognized.
What is Positional Trading?
Positional trading is a slow-paced method in which the trader holds his position for several weeks. Sometimes, it can continue for even longer, like months or years. This trading method, too, needs little time from the trader daily and owing to the fact that the trader is holding the position for long intervals of time, the transaction costs aren’t really of the trader’s concern. Still, it has some drawbacks, like the traders can miss the short-term immediate profit opportunities.
Once you have a rough idea about what is positional trading, let’s dive in deep and figure out everything you ought to know about this trading method, including its pros and cons and whether or not it is the right choice for you.
Which Trading Styles Go Best with Positional Trading?
A trend trading style is used the most by position traders who believe that markets will move in one direction over time. The position trader who uses this strategy is looking for a trend in the market and will trade on it. This is achieved by buying stocks that have been rising and selling those that have been falling. This type of trading style can be profitable over time, but some traders may find themselves taking losses if they are not careful.
What are Position Traders?
When it comes to position traders, they are the ones following the trends, so once they have spotted a particular trend, what they do is buy the asset accordingly, hold it for a particular period until the value of that asset reaches its peak value and that’s when they crack the deal and sell those assets, making themselves a good profit.
You should not confuse the position trader with buy-and-hold traders as the latter keep their position for a longer period and are generally passive investors.
What is a Trend?
The trend is a movement pattern in a time series, either up or down. It is the general movement of the price of an asset over time. The forex market is one of the most popular markets for speculators because it offers high returns with low risk. This has led to an increase in the number of traders in this market and made it harder for them to decide what to do next.
The trend is one of the most important indicators traders use when trying to predict where prices will go next. It helps them decide whether they should buy or sell their assets based on what they see happening in these trends.
Some of the most popular types of the trend are the bullish trend, bearish trend, and neutral trend.
- The bearish trend or the downtrend is when prices fall. A general decline in stock prices, declining interest rates, and falling commodity prices characterize it. Several factors, including economic uncertainty, global inflation, or a sudden shift in investor sentiment, could cause the bearish trend.
- On the other hand, a bullish trend or up-trend is when prices rise. During this period, the price of the particular asset rises, and the bullish trends may be caused by economic factors or changes in investor sentiment. Increased demand for the asset and an increased number of buyers also characterizes it.
- A neutral (or flat) price movement is when there is no clear up or down movement, or you can say both movements are occurring side by side. It develops when the price starts to encounter levels of support or resistance, and there is a time of stability following a prolonged rise or decline in price.
The most popular example used in explaining trends is the price movements of a currency pair over a given period. These patterns often occur over days and weeks and can be identified by analyzing historical data. The simplest way to identify trends in share trading is by performing technical or fundamental analysis or both.
What is the difference between Position Trading and Buy-and-Hold Trading?
Building a portfolio to achieve overall profitability across all positions constitutes buy-and-hold trading. This trading method does not require you to constantly observe it and leaves you with a lot of free time after spending a lot of effort initially choosing the assets to include in your portfolio. Thus, you have to put in maximum effort initially, but afterward, you will get a lot of free time on hand.
The main thing that differentiates position trading from buy-and-hold trading is the period for which the trader holds the position; as in buy-and-hold trading, the trader holds the position for a longer time than in positional trading. You can think of buy-and-hold trading as the retirement plan of the trader.
What is the Difference between Position Trading and Day Trading?
Day trading can be carried out over a range of time frames, and the person who can dedicate time to trading daily is known as a day trader who closes out all of his positions at the end of the trading day. Day trading is the hardest of all methods as it is a quick-moving trading format that needs ongoing supervision, and the trader needs to stay alert to avoid missing a buy signal.
Thus, it is the opposite of position trading, in which the trader holds the position for a longer time. If, on the one hand, the position traders take advantage of the long-term trends in the market and it isn’t psychologically that demanding, the day traders take advantage of the short-term fluctuations that take place in the market daily, which means that they have to be on their toes all day scanning the market, making day trading too much psychologically demanding.
What is the difference between Position Trading and Swing Trading?
Now swing trading has features between position trading and day trading. Like positional trading, it is a slow-paced trading method in which the trader holds the position for about a day to a few weeks, but what differentiates the two is the timeframe for which the trader holds the position. In swing trading, the period lies somewhere between a day to a week but in positional trading, the trader holds the position not only for weeks but sometimes months or even years.
For beginners, swing trading may seem lucrative as it requires less time, like 15 minutes, to survey or examine the market so they can place bids at the latest when the next market opens. Most traders opting for this method target short- or medium-term price swings. No doubt that swing trading often provides some really good profit opportunities, but on the downside, the trader is also vulnerable to overnight risks.
Is Position Trading Risky?
Well, it is often considered that the smaller the time frame of a particular trade, the riskier it will be. It is the least risky trading method as the trader holds the position for a long time, but the exceptions are always there. If the trader makes a mistake or a wrong decision, it can be drastically fatal as he will lose his investment and the time he put into it.
What are the Pros of Position Trading?
- Less risky owing to the long-term investment as compared to the quick investment methods like day trading or scalping
- Requires less involvement on the trader’s part as it does not require the trader to be on their toes all day long
- It is less psychologically demanding.
- Transactions cost isn’t a concern as the trader is holding the position for a long time.
- Traders can also use leverage to amplify their profits from these trades.
- Potential profit can be gained from the spread between the bid and ask price when trading currency pairs with low liquidity.
What are the Cons of Position Trading?
- Position traders can miss the short-term immediate profit opportunities
- Large capital is required
- Trend reversal risks
- It locks up the investment for a long time and requires a lot of patience on the trader’s part.
- It’s sometimes hard to find an entry point because there are so many different factors in forex markets, such as news events, economic reports, etc., making it hard to know exactly where a currency might be heading in the future.
- While it’s the least risky trading method, if the trader makes a mistake or a wrong decision, it can prove to be drastically fatal for him as he will lose not only his investment but also the time he put into it.
- Chances of low liquidity as the capital is invested for a long time.
Positional Trading Indicators
A positional trade indicator is a class of technical trading indicators that use price movements to indicate a particular asset’s relative strength or weakness; they can be used to determine whether a particular currency pair will have a bullish or bearish trend. These indicators give traders a clearer view of what is going on inside the market, which helps them make better decisions when trading.
They are used by traders looking to enter or exit positions based on price movements and can be used to predict the direction of a stock, index, or currency pair.
Moving Averages (50, 100, 200 SMA)
Moving averages are the lagging indicators (as they change after the actual change in the price of an asset in the market) that help traders determine when to enter or exit a position. It is worth mentioning that generally, for position traders, 50 days moving averages are the best-suited ones.
Support and Resistance
One of the popular positional trading indicators involves support and resistance. They help them to predict the price direction of an asset. Support and resistance levels signal a price trend and are used in many ways, such as identifying trade entry points or determining the best time to open or close a position.
The support level is the price point below which a currency pair won’t fall, while the resistance is the price point beyond which the currency pair is unlikely to rise.
You can figure out the support and resistance levels by looking at the technical indicators, considering the previous points of support and resistance levels, looking through the peaks and troughs, and analyzing the historical price data.
MACD
The Moving Average Convergence Divergence (MACD) is one of the most popular indicators in trading. The MACD indicator is a trend oscillator used to determine trend direction and whether a trend has started or ended.
Traders use the MACD indicator to identify the strength of a trend. When the MACD line crosses above the zero line, it indicates that a new uptrend has begun, and it is better to enter the trade and buy the assets. When it crosses below zero, it signals that a downtrend has begun, and it is better to exit the trade and sell the assets.
Trading Breakouts
For position traders who want to enter a trend cycle right at the beginning by opening positions, trading breakouts on any financial market can be beneficial as they can reveal important information regarding the beginning of a new trend.
Pullback and Retracement Strategy
Trading is a game of risk and reward. The more risk you take, the greater your potential reward. However, this also means you are more likely to lose money if you’re not careful. A pullback and retracement strategy is an indicator of position trading which works by looking for a price level where the price has pulled back from the previous high point on the chart.
Simply, a pullback is a time when the market uptrends for a short time, thus increasing the prices. On the other hand, retracement is when the market downtrends for a short interval and the prices of assets fall. So the position trader buys when the prices are low and sells when the prices are high. Thus, the purpose of the pullback and retracement strategy is to buy the currency pair at its low value and afterward sell it at its highest one just before the market takes a downfall.
Once the market is low, buying the asset again this way, the trader will make good profits.
If you want to start small, you can read if you can start Forex trading with $100 here.
Tactics for Position Traders
Position traders make money by taking advantage of the price movements of an asset and can use different strategies to control their risk and improve their odds of success by making informed trading decisions. Some strategies are:
Technical analysis
Using past market data and indicators like the volume and price of assets and the relative strength to predict where prices will go in the future. Position traders typically have two options when using technical analysis.
They can either trade the assets that have a high likelihood of trending but, for the time being, haven’t yet started trending. While this trade may offer higher returns but has more risk associated with it and requires more research on the trader’s part.
On the other hand, the position traders can trade assets that have already started trending, which may not make sizable profits but is less risky and requires less research on the trader’s part.
Fundamental analysis
Analyzing the company’s financial statements, researching how its industry is doing, and the current market situation to predict future price movement.
Tecno fundamental analysis
The decision-making process for a techno-fundamental analysis combines the technical and fundamental analyses that investors can use to identify potential investments and traders to make informed decisions on trading strategies.
Macroeconomics
Using news from macroeconomic indicators such as GDP, unemployment, interest rates, and inflation to predict the future price movement of a given asset or index.
Current market trends
Analyze the current market trends as well as look at the historical data that may help you to predict the price movement
Controlling risk via stop loss
A stop order is positioned at a certain place from the entry. Now what it does is that a market order will be executed as soon as the market reaches the stop level, and you will be removed from the trade.
All in all, position traders typically analyze the market trend. According to analysis, buy an asset when it is cheap, hold it for some time and sell it when it reaches its peak value. This allows them to profit from price changes in the market while minimizing risk.
Is Positional Trading for You?
Positional trading is a strategy that allows you to make trades in anticipation of future market movements. Thus, it is a long-term investment strategy. Consider positional trading if you are patient enough and want to build something for the future. On the other hand, if you want quick profits or are relying totally on trading to settle your bills, then it is better to opt for a quicker trading method like day trading.
All in all, positional trading takes advantage of the market’s inherent volatility by buying and selling assets like currencies based on the expectation for future price movements, as the position traders are the trend followers. In general, positional trading is suitable for the bull market, in which stock prices are rising, which means that the position traders can buy an asset, hold it for a defined period and then sell it once the asset’s value reaches its peak.
On the other hand, in a bear market, this strategy becomes a bit difficult to practice because the prices of stocks are falling. Lastly, when it comes to the neutral market, where there is no clear up or down movement, or you can say both movements are occurring side by side, it is better to stay inactive or not take any position.
Where should I Practice Positional Trading?
It is better to practice positional trading on a demo account as by doing so, your money won’t be at stake, and you can practice your strategies well, and afterward, you can move to the real account.
If you are new to Forex trading and want to know more about it, our beginner’s guide for Forex trading will surely come in handy.
Conclusion
We have answered “What is positional trading” and explained its pros and cons. Whether or not it is the right trading method depends on your choice, risk tolerance, patience level, and capital. All in all, if you are a new trader who is just starting out, it is better to start with small investments, which means that it may be better to stay away from positional trading, which requires a large investment and a lot of patience. But if you are an experienced trader who wants to expand your portfolio and has enough patience, go ahead. We hope that you have understood the key concepts of positional trading.
Have a nice day!
References
- A Forex trading expert system based on a new approach to the rule-base evidential reasoning
- Longer time frame concept for foreign exchange trading indicator using matrix correlation technique
- Forex for beginners
- What is forex trading?
FAQs
How do you trade in positional trading?
In positional trading, the trader holds his position for several weeks. Sometimes, it can continue for even longer, like months or years. So if the trader thinks that the market will go in the uptrend, he buys the assets (currency pairs), holds them for a particular time, and once the price of those currency pairs hits their peak value, he sells them to make profits.
Is position trading profitable?
Position trading can prove to be profitable if the trader has correctly analyzed the market trend as it is completely dependent on his analysis that either he should enter a trade or exit it. So after analysis, if the trader thinks that the price of an asset will increase in the future, he buys that asset, holds it for some time, and sells it when it reaches its peak value which will allow him to profit from the price changes in the market while minimizing risk. Moreover, transaction costs aren’t much of a concern as the trader is holding the position for a long time.
What do traders do when they open a long position?
An open position means that the trade is active, so when the traders open a long position, it means that they buy an asset to make a profit when the price rises.
How long can you hold a position trading?
In position trading, you can hold your position for several weeks or even longer, like months or years.
