What is Position Trading?

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Contributor, Benzinga
August 30, 2023

If you struggle to capture long-term market trends and generate consistent profits, you might want to consider position trading. Unlike day trading or swing trading, position trading does not require frequent market analysis or constant monitoring of price movements. Instead, position traders rely on fundamental and technical analysis to identify and follow significant market trends. 

This article will explain what position trading is, how it works, its benefits and challenges and some of the best position trading indicators and strategies.

How Does Position Trading Work?

Position trading is a strategy that involves profiting from long-term market movements. Unlike day traders or swing traders, position traders are not interested in short-term fluctuations or noise in the market. Instead, they look for significant and lasting changes in the market's direction, such as economic cycles, industry trends or global events. 

Position traders use a combination of fundamental and technical analysis to identify these trends and determine the best entry and exit points. Fundamental analysis involves evaluating an asset's intrinsic value based on its financial performance, growth potential, competitive advantage and other factors. Technical analysis, on the other hand, studies an asset's historical price patterns, trends and indicators using charts and tools. 

Traders use fundamental analysis to select assets with strong fundamentals likely to be appreciated over time. They then use technical analysis to confirm the trend's direction and strength and time their position trades accordingly. 

Position traders differ from day or swing traders in that they can maintain their positions for extended periods, sometimes months or years. They tend to execute fewer trades per month or year. Position trading also has a higher risk-reward ratio than day or swing trading. While day and swing traders aim for small but consistent profits with low risk, position traders aim for large but infrequent profits with high risk. 

Benefits of Position Trading

Position trading has several benefits that make it appealing to many traders. 

  • Potential for higher profits: Position trading can generate higher earnings than day or swing trading because it allows traders to capture the full extent of long-term market trends. Position traders can benefit from compounding returns and exponential growth by holding positions longer.
  • Reduced stress and time commitment: Position trading allows traders to set their trades and then wait until they reach their target or stop-loss levels, reducing stress and time commitment compared to day or swing trading. This approach provides more free time and flexibility in traders' schedules.
  • Ability to ride long-term market trends: Position trading allows traders to capitalize on long-term market trends based on underlying fundamentals. Position traders can identify profitable opportunities by avoiding short-term fluctuations and exploiting market inefficiencies.

Potential Challenges of Position Trading

Position trading also has some challenges that traders must be aware of and overcome. Some of these challenges are:

  • Market volatility and unexpected events: Position traders must be ready for sudden market volatility and unpredictable events that can harm their positions. Economic data releases, news headlines, geopolitical events and natural disasters can cause price swings, reversals, gaps or shocks. If they’ve borrowed money and the position goes against them, traders need adequate capital to withstand these fluctuations and avoid margin calls.
  • Unexpected news and global economic shifts: Position traders must remain alert to unforeseen news and economic shifts that may alter trend direction or strength. Flexibility is key, as is a clear exit strategy and risk management plan to safeguard profits and minimize losses.
  • Developing resilience and adaptability in position trading: To succeed, you must possess resilience and adaptability. Patience and discipline are necessary to hold positions for extended periods without being swayed by short-term gains or losses. Confidence and conviction in your analysis and strategy, free from emotions and opinions, are also crucial.

Positional Trading Indicators

To succeed in position trading, traders must use reliable positional trading indicators to help them identify and follow long-term market trends. Some of the most popular positional trading indicators are:

Moving Average Over 50 Days

A moving average calculates an asset's average price over a set time. The moving average over 50 days (MA50) is when closing prices of the last 50 days are averaged. This indicator helps traders see the trend direction and strength by smoothing out price fluctuations. The MA50 also acts as dynamic support or resistance depending on its position relative to the price. Traders can enter or exit a trade depending on whether the price crosses above or below the MA50.

Support and Resistance

Technical levels known as support and resistance indicate where the price may reverse or bounce. Support is where buyers tend to emerge and the price rises, while resistance is where sellers appear and the price falls. These levels can be horizontal, diagonal or curved depending on the trend. Traders can use them to identify entry and exit points, buy near support and sell near resistance based on the trend direction.

Developing a Position Trading Strategy

When creating a position trading strategy, traders must consider the asset type, current market conditions, risk tolerance and trading goals. Some popular position trade strategies include:

Positional Share Trading

Positional share trading involves buying and holding shares of companies with strong fundamentals and growth potential. Traders use fundamental analysis to select competitive shares with high earnings, low debt and positive cash flow. Technical analysis confirms the trend and times position trades. This strategy can be profitable in bullish markets, where share prices tend to rise over time.

Position Trading in Forex

Position forex trading, also called carry trading, involves buying high-interest currencies and selling low-interest currencies. This strategy allows traders to earn interest on the difference. It is profitable in stable markets where exchange rates favor the high-interest currency.

Positional Commodity Trading

Positional commodity trading involves purchasing and holding commodities with high demand and low supply or vice versa. Traders use fundamental analysis to identify commodities with strong demand drivers, such as population growth, industrialization or climate change. Technical analysis is then used to confirm the trend and time trades. This type of trading can be profitable during volatile markets where commodity prices fluctuate from supply and demand shocks.

Positional Index Trading

Positional index trading involves buying and holding index funds or ETFs that track the performance of a specific market index, like the S&P 500 or the Dow Jones Industrial Average. Traders analyze overall economic health and use technical analysis to confirm trends and time trades. This tactic can be profitable in trending markets where index prices move in one direction for long periods.

Trading Breakouts

Trading breakouts involves buying or selling an asset when it breaks out of a consolidation pattern, which can signal the start or continuation of a trend. It can be profitable in breakout markets with rapid, large price movements.

Position Trading vs. Swing Trading

Position and swing trading are two popular strategies with distinct differences. Here are the key variations:

  • Time horizon: Position trading has a longer time horizon than swing trading. Position traders hold their positions for months or years, while swing traders hold them for days or weeks.
  • Frequency: Position trading has a lower frequency than swing trading. Position traders make fewer trades per month or year, while swing traders make multiple trades per week or month.
  • Risk-reward ratio: Position trading has a higher risk-reward ratio than swing trading. Position traders aim for large but infrequent profits with high risk, while swing traders aim for small but consistent profits with low risk.
  • Indicators: Position trading uses different indicators than swing trading. Position traders use fundamental and technical analysis to identify long-term market trends, while swing traders use technical analysis to identify short-term price movements.

Position Trading: A Long-Term Trading Strategy

Position trading is a long-term strategy that combines fundamental and technical analysis to focus on major market trends. This approach allows traders to avoid stress from constant monitoring while capturing significant shifts in the market. Despite challenges like volatility and unexpected events, the discipline, resilience and adaptability required in position trading can lead to higher profits and rewarding results over time.

Frequently Asked Questions

Q

Is position trading profitable?

A

Position trading can be profitable if you can identify and follow long-term market trends reflecting the underlying fundamentals. 

Q

What is an example of a position trader?

A

An example of a position trader is Warren Buffett, known for buying and holding shares of companies with strong fundamentals and growth potential for decades. Buffett uses fundamental analysis to select companies with competitive advantages, high earnings, low debt and positive cash flow.

Q

Is Warren Buffett a position trader?

A

Yes, Warren Buffett is a position trader who buys and holds shares of companies with strong fundamentals and growth potential for decades.

About Anna Yen

Anna Yen, CFA is an investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about investment topics ranging from traditional asset classes and derivatives to alternatives like cryptocurrency and real estate. Her work has been published on sites like Quicken and the crypto exchange Bybit.