Position trading explained and how to use it

What is position trading?

Position trading is a longer-term strategy where a trader holds a position for weeks, months, or even years, aiming to profit from major price trends rather than short-term fluctuations. Position traders are typically less focused on short-term price movements and tend to rely on longer-term trends. Position traders usually use a combination of technical analysis and fundamental analysis when making decisions, but also take into consideration other factors such as market trends and historical patterns. This style of trading most closely resembles buy-and-hold investing, but with several key differences. One distinction is that traditional buy-and-hold investors can only take long positions, whereas position traders using CFDs can go both long and short.

Position trading strategies

Position trading is the trading strategy most similar to traditional investing. Position traders profit from long-term price movements and, consequently, are more interested in markets that have well-defined trends and narrow price ranges, rather than markets that experience high volatility and wider trading ranges.

Positional share trading

Position traders often trade company shares. As a general rule, asset classes such as shares tend to follow more stable trends than volatile markets, such as forex markets. Despite the occurrence of certain events, such as market announcements or relevant news, fundamental analysis of an underlying company represents a solid base from which position traders can evaluate the intrinsic value of a company and consequently, evaluate potential opportunities based on their own analysis and market outlook. Some traders may base their decisions on longer-term expectations for specific companies or sectors.

Positional commodity trading

Commodities are often influenced by long-term macroeconomic factors such as supply and demand cycles, production costs, and global events. While they can be volatile in the short term, position traders may consider commodities suitable for long-term strategies, as prices often revert to broader trend movements under certain market conditions.

Positional index trading

Stock indices represent baskets of companies, usually from the same country, region, or sector. Some position traders may favour indices due to their relative trend stability over certain timeframes.

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Position trading in forex

Due to their higher volatility, currency pairs may be less commonly used in some position trading strategies. Forex trading​ is very popular among short-term traders, such as day traders​​ and forex scalpers.

Trading breakouts

Trading breakouts in any financial market can be useful for position traders, because they can provide significant information about the beginning of the next significant movement in the market. Traders who adopt this technique typically attempt to open a position at the beginning of a trend.

Positional trading indicators

Position traders tend to use both technical and fundamental analysis to evaluate potential price trends on the market. Here are some examples of popular technical indicators that can be used for position trades on any of the financial markets mentioned above.

Moving average over 50 days

The 50-day simple moving average indicator is an important technical indicator in position trading. The reason is that 50 is a factor of both 100 and 200, which have corresponding moving averages that can serve as indicators of long-term trends.

Support and resistance

Support and resistance levels represent key price points where an asset has historically struggled to move beyond (resistance) or fallen below (support). These levels help position traders decide when it may be better to open or close a position, as prices often react strongly around them. Position traders therefore monitor these levels closely when deciding whether to open or close positions.

Position traders will use long-term resistance, for example, to decide when to close a position, relying on the expectation that the security would drop upon reaching this level. Likewise, position traders could buy at historic support levels if they believe a long-term upward trend will begin.

Position vs swing trading

Although both are based on the concept of trend following, position trading and swing trading differ in the length of time positions are held. Position traders hold their position for a longer period of time than swing traders, usually months or years, whereas swing traders usually hold their positions for several days or weeks.

Position trading vs day trading

Position trading is often viewed as being at the opposite end of the spectrum from day trading, which focuses mainly on short-term market fluctuations. Day traders aim to buy and sell multiple assets with the aim of closing their positions before the end of the trading day, rarely holding them overnight.

Advantages of position trading

• It is a long-term strategy that may offer the potential for gains over the long term, though outcomes depend on market conditions and risk management.

• It generally requires less frequent monitoring than short-term strategies, as positions are not usually adjusted on a daily basis.

• By holding positions for longer periods, traders may benefit from significant market moves that shorter-term strategies might miss.

Disadvantages of position trading

• Capital may be tied up for extended periods, as trades can last for several months or longer.

• Holding positions for long periods can result in the accumulation of fees, which may become significant over time.

• Although position trading generally involves less frequent decision-making than short-term strategies, it still carries market risk, and unfavourable moves can result in significant losses.

Ultimately, position trading is a more patient and long-term approach that aims to capture major market trends. It requires discipline and effective risk management, making it a method some traders use when focusing on fewer trades and broader market movements. As with any trading style, outcomes can vary, and it is important to apply consistent risk management and maintain a structured trading approach.