What is Positional Trading?
Positional trading (position trading) is a style of trading aimed at profiting from long-term trends. Position traders are less concerned with the short-term market fluctuations but very interested in the primary trend. They refer to both technical and fundamental data when making their trading decisions. The approach is often opposed to day trading where a bigger number of trades is executed. Due to the nature of positional trading, it is often considered to be more like an investment in comparison to short-term speculation. Commonly applied in long-term strategies, a position trade may last from a few weeks to several years. It is popular in various markets.
The Role of Technical Analysis
Technical data is of great importance for anyone interested in positional trading. Mainly it helps to determine the right time to go into a trade as well as the time to go out of a trade. Positional trading indicators include weekly and monthly charts. Such tools as a trade line indicator, support and resistance levels, and moving average indicators can all be useful in placing long-term positions.
Showing a price movement of your asset, a trend line gives an impression of the price fluctuations on a larger time frame. Support and resilience levels are two important horizontal lines for identifying the best time to enter positional trading. Finally, the moving average indicator is a great help in identifying where to place a stop-loss.
The Importance of Fundamentals
Apart from technical data, the fundamental evidence is critical for successful positional trading. It is a trader’s routine to keep an eye on macro-economic data of the countries of the relevant currency pairs. Inflation rates, interest rates, and trade balance represent valuable information that helps a trader to predict future price moves.
What Instruments are Used in Position Trading?
The position trading approach is applicable for various financial instruments including stocks, currencies, options, contracts for difference, and futures contracts. However, due to the long-term nature of this trading style, it enjoys the most popularity in instruments with a relatively wide price range. Such instruments as shares CFDs and commodity CFDs offer great opportunities for a successful trade as they tend to be more stable. Currency pairs, on the other hand, are more prone to volatility and subsequently less traded by position traders. Nevertheless, there are people who use this approach in the forex market mainly in the time of significant political and economic news that can determine a long-term trend.
Position Trading Strategies
Position trading approach can be attributed to several forex strategies. All of them are implemented on high timeframes with the major concern of substantial market trends and disregard of so-called "market noise" or temporary fluctuations. The strategies are also characterized by great profit potential. We will review two common strategies known as the trading breakout and pullback strategy.
A breakout of a support or resilience level often indicates the beginning of a new trend. When the price breaks through the support level, a trader opens a short position (sells the instrument). Conversely, when the price of the instrument breaks above the resistance a trader uses a long position in trading (buys the instrument). Both examples imply setting a loose stop-loss for an occasion if the price reverses. Tight stop-loss might lead to a situation in which the order is closed too soon because of minor fluctuation against a trader. It is also recommended to use trailing-stops which limit the risks of a price reversal.
A pullback is a pause or minor reversal in the main trend of a price. A longer-term trend is always accompanied by brief market dips. This is when a pullback strategy may come in handy. Pullback traders benefit from pauses like this.
The strategy employs the "buy low, sell high" principle, where a trader buys an asset at a low price and sells it right before the upcoming market dip. Once a dip occurs, our trader buys the asset at a much lower price. If executed successfully, a trader not only profits from a long-term trend but prevents possible losses from the dips. This strategy requires deep technical analysis with the use of retracement indicators.
Risks Associated with Position Trading
Despite the obvious advantages of the position trading approach, its adherents bear certain risks. The main risk of this approach is the possibility of a trend reversal before it reaches the point anticipated by the trader. Small fluctuations can lead to the correction and a complete reversal of the trend.
There is another limitation of position trading. Since this approach implies investing funds for a relatively long period of time, it is crucial to make sort of an investment plan so you don’t have to leave the market ahead of schedule. Planing things out is a key to success.
Practice Position Trading Using a Demo Account
We recommend that you test position trading on our teaching account. Opening a demo account is free of charge, easy and what’s most important doesn’t require any deposits. It allows beginner traders to track market movements in real time, place orders, and earn virtual money. Demo accounts have proved to be a great way to test strategies without the risk of money loss.
If you feel confident in your skills, don’t hesitate to open a trading account and start making real money today!
Positional Trading Tips
Experienced position traders point out a few principles that help them reach their goals:
- Mind the economic data. As has been mentioned before, fundamentals are your best friends. Follow up on major economic and political news to be aware of the factors that might affect your asset’s price. You can subscribe to our regular news to read about major economic events as well as forex daily forecasts!
- Always confirm fundamental evidence with technical data. There are a few indicators you would want to use. Keep an eye on 50, 100, 200, and 500-period moving averages to see the big picture rather than temporary price moves.
- Stay calm in times of volatility. False breaks happen occasionally. Don’t let them distract you. Switch your price chart settings to the line chart instead of using candlestick or bar charts to reduce market noise. One of the most important skills for a position trader is being able to distinguish between the market noise and a real long-term trend.
- Do not set a tight stop loss. A tight stop loss will close your order at the first sign of fluctuation before you even get the chance to make any money. To prevent a situation like this, set a loose stop-order so there is still room for a short-term trend that plays against you.
Position trading suits the most patient traders, who have a deep understanding of fundamentals. Fundamental data is crucial for position traders as it determines the long-term trends of currency pairs which is so important for those playing the long game. The obvious advantage of positional trading is that a trader does not have to spend all his time in front of the computer. He/she tracks the open position from time to time following the events that take place in the market. Small price swings have little importance to a position trader, so there is no need for frequent market monitoring.
The length of time of a trade justifies large stop-losses in position trading. It means that the losing periods might bring serious loss but also means that the potential income multiplies. This is why this approach not only requires patience but also a high degree of risk tolerance as keeping a long-term trading position guarantees going through the loss periods.