67.90 % of retail investors lose their capital when trading CFDs with this provider.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67.90 % of retail investors lose their capital when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

What is position trading?

Published: 01.06.2023

The slowest trading style that does let you think every opportunity through while being also quite demanding in terms of account size. But how does position trading fit into the context of other trading styles and for which types of traders is it suitable? That is what we will discuss in today's article.

There are 4 primary trading styles in trading:

  • positional,
  • swing,
  • intraday,
  • scalp.


Each of these styles has its own specific trading strategies and each of these strategies approaches risk management, opening and closing trades, etc. in a different way placing different requirements on the trader.

In general, beginner traders should start on higher time frames, where the price does not move as quickly, and then work their way down to lower time frames. So this should mean that position trading is suitable for beginners, right? Well, it is not so straightforward…

What is position trading?

Position trading is a financial market trading approach in which an investor holds trading positions for an extended period of time, often several weeks to months.

In position trading, traders focus on identifying long-term trends in the markets. In doing so, they seek to take advantage of these trends and maximize their potential profits.

By holding a position for several weeks or months, a trader must take into account not only technical but also fundamental analysis when position trading. Technical analysis deals with the movement of the price on the chart, which can be supplemented by various indicators. Fundamental analysis looks at how macroeconomic indicators such as gross domestic product, inflation, employment, etc. affect the price of a given instrument.

 

In the following example, we have a chart of the SP 500 index as it looks in the MT4 trading platform. The index is complemented by a stochastic indicator and the chart shows the movement of the index on a monthly time frame. In the chart, we can see that the SP 500 index is practically growing in the long term. The price dips are then used by traders or investors to buy at a discount.


SP 500 Index on a monthly time frame
SP 500 Index on a monthly time frame


Based on the conclusions of the technical and fundamental analysis, the trader then decides whether to speculate on an increase or decrease in price. If he speculates on a price rise, he opens a so-called long trade. If he speculates on a fall in price, he opens a short trade.

Specifics of position trading

  • Long-term trading positions

    Position traders enter a trading position that they try to stay in for the duration of the trend. This can last for weeks or even months.

  • Time-saving

    Compared to other trading styles, position trading does not require frequent chart checks. Once the trade is set up, just set the stop loss and take profit levels and hope for the desired outcome.

  • Unnoticed trend reversal really hurts

    The main risk with position trading is that slight fluctuations that a trader ignores can unexpectedly lead to a trend reversal. It is very frustrating to see a trade that has been in profit and building for several weeks suddenly reverse and end up in loss.

  • Patience demanding

    Position trading requires patience and resilience to short-term price fluctuations.

  • Financially demanding

    In order for position trading to generate interesting profits, you need a larger trading account. Another disadvantage is that the money is tied up to your position for a long time. This means that if you spot another interesting trading opportunity while building your position, you will most likely have to let it slip away.


All trading in the financial markets involves risk, which can ultimately mean the loss of your entire account. Therefore, even with position trading, it is necessary to follow the rules of risk management. This means that a trader should know when to exit a transaction if he or she runs into a loss. He should also have a set percentage of the account size that he is willing to risk per open trade.

Experience the benefits of trading with Purple Trading


Your capital is at risk.

Which markets are position trading suitable for?

Position trading can be done in virtually any market. However, when selecting the appropriate market, it is necessary to take into account the purpose for which the trader has chosen the positioning strategy.

Position trading can be used for stocks, futures, options, as well as CFD contracts, which we offer to our clients. CFD contracts are derivatives whose price is derived from the price of the underlying asset. CFDs have the advantage of allowing speculation on both price increases and decreases. Furthermore, due to the leverage, which is up to 1:30 at Purple Trading, they also allow you to trade a larger investment volume even with a smaller account. However, it is important to note that while leverage can accelerate gains, it can also accelerate losses.

Note: When using a positioning strategy on CFD contracts, you need to take into account the fact that when holding transactions overnight, swaps are created on the instruments. These can be positive or negative. Swaps are effective amounts that are credited to the client's account in the case of positive swaps or, conversely, deducted from the account in the case of negative swaps. If you are interested, take a look at the swap conditions at Purple Trading.

Trending markets

As for the purpose for which traders choose position trading, it may be to try to profit from a long-term trend, where the profit for the trader will be determined by the difference between the buy and sell price of the instrument. In such a case, for position trading, it is necessary to select a market that tends to form long-term trends at certain stages.

Such a market may be stock indices or certain commodities. In addition to technical and fundamental analysis, information on so-called seasonality can be used to advantage. In fact, recurring tendencies for price movements in a certain direction over a certain period have been observed in some instruments. Gold, for example, tends to appreciate most in January and February according to seasonality.

Markets in a sideways trend

If the market is moving in a sideways trend, then the sideways trend can be used for special positioning strategies called carry trade. In the case of these strategies, the trader's goal is to profit from the positive swaps that result from holding the trade and that are generated overnight for each day the instrument is held.

Note: Another reason for position trades may be to hedge a foreign currency account against exchange rate risk. If a trader has a trading account in US dollars and does not want to lose the value of the account converted into let’s say Czech crown when the crown appreciates, he can do this by opening a transaction on the USDCZK currency pair in the short direction in the MT4 platform and holding this transaction for a long period of time. The strengthening of the crown on this pair will then generate a profit that will offset the losses from the exchange rate translation of the dollar account balance.

On which time frames to trade positionally?

Since a position trader will want to identify a long-term trend, then he should base his trading on some long-term higher time frame. On the lower time frame he will then identify the point of entry.

Since different time frames exist simultaneously in the markets at any given time, this has one consequence, namely that there may be conflicting trends within a particular instrument depending on the time frame being examined. It is not uncommon, for example, that when the SP 500 index is in an uptrend on a monthly frame, it will see a downtrend on a daily frame.
 

A different framework for identifying the trend and a different one for entering the market

As a general rule, the longer the time frame, the more reliable the signals. Traders should ideally use the higher time frame to define the primary trend of what they are trading and the lower time frames to fine tune the trade entry.

When position trading, a trader could focus on monthly and weekly charts to define the primary trend and daily charts (or H4 charts) to fine tune entries and exits.

On the next chart, we again have an example of the SP 500 index with a stochastic indicator, this time on a weekly frame.

SP 500 Index on a weekly time frame
SP 500 Index on a weekly time frame


You can see that while on chart 1 the stochastic was below 20 only once, there are many more possibilities on the weekly chart. How to take advantage of this? For example, a trader can have a strategy that whenever the stochastic in an uptrend gets below 20 on the weekly chart, it will be a buying opportunity for him. These are points 1, 2, 3 and 4.

The choice of time frame in position trading is of course individual and depends on the approach of each trader. The ideal is to start with the time frame that the trader is primarily interested in and supplement this with higher and lower time frames to confirm the overall trend and to refine the entry.

Advantages and disadvantages of position trading

Advantages

Time-saving style

+ Ability to think through every entry

Disadvantages

Financially demanding

High demands on patience

Position trading is a style that is based on long-term trends. It requires the trader to hold the trade for several weeks or even months. The style is time-saving and may suit some traders. The disadvantage is that a long-term profitable position can become a losing one if the trend changes and the trader does not catch it. Therefore, some traders prefer faster trading methods. One of them is swing trading, which we will look at in the next article.

Deepen your knowledge of the financial markets with our ebooks and articles


Ebook: How to trade Forex

An essential read for all beginner traders
 


Article: Introduction to Price Action I

Learn the basics of your favorite technical analysis approach
 

 

Recommended article:

Key terms

Carry trade
Show answer
It is a trading strategy that exploits the differences between interest rates for different currencies. A trader can receive a return if he buys a higher interest-bearing currency and sells a lower interest-bearing currency and holds the currency pair overnight.
CFD - contract for difference
Show answer
It is a trading instrument; its value is derived from its underlying instrument, which can be for example a stock index or a future contract. Settlement of this instrument type is always performed financially, therefore the client speculates on future value difference of the underlying instrument while he/she does not become the owner of it.

 
Day trading
Show answer
It is a strategy where a trader enters a trade on one day and exits the trade on the same day.
Long
Show answer
A long position (long speculation) is a trade that a trader enters when he expects the market to rise. Thus, the trader will buy the asset in question (BUY). The position will appreciate in value when the price of the instrument rises.
Scalping
Show answer
Trading strategy type which uses minimal market moves with higher frequency of trades made in order to make a profit.

 
Short
Show answer
Short speculation is a trade where the trader anticipates a market decline. So the trader will sell the asset (SELL).
Trend line
Show answer
A trend line is a technical analysis tool. It is a straight line formed by connecting at least two points on the price of an instrument. It can be downward or upward. It is used to determine the trend or supports and resistances within the trend.
67.90 % of retail investors lose their capital when trading CFDs with this provider.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67.90 % of retail investors lose their capital when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.