What is position trading?

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}

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.

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}

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.

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