Position trading is a strategy that involves holding a trade position for long periods, which can be several months or even years. It is a strategy that requires a lot of patience, with position traders never bothered with short-term price fluctuations in the market. Position traders seek to capture the bulk of profits in a long-term trend. They essentially ‘take a position’ in the market and stick with it for as long as possible. This can either be a bullish or bearish position.

While most traders are excited by the thrill of capturing short-term profits in the market, there is proof that ‘time in the market’ is better than ‘timing the market’. Long-term investors generate stable, predictable returns and outperform active short-term traders. The long-term horizon of position trading also allows for maximum objectivity by taking subjective emotions out of the equation. Furthermore, tax benefits and low overall transaction costs are associated with position trading.

Position trading is also a very time-efficient strategy. That is, there is no need to constantly check your portfolio, worry about short-term volatility, or track every market news or investment advice. You need to keep calm and apply your strategy objectively – because in the markets, ‘less is more.’

A position trader uses a combination of trading strategies in the market. Still, they mainly rely on fundamental analysis and broader macroeconomic factors to form a conviction about the long-term trend of an underlying asset.

Position Trading Vs Swing Trading

Position trading seeks to take advantage of long-term trends that typically last several months or even years. On the other hand, swing trading aims to take advantage of medium-term trends that usually last a couple of days or weeks.

The two strategies also differ in the primary mode of analysis. Position trading focuses more on broader fundamental analysis to identify and take advantage of long-term trends in the market. In contrast, swing traders mainly utilise technical analysis to forecast and exploit emerging medium-term trends in the market.

Downsides of Position Trading

Position trading also has some disadvantages. Its long-term nature means that you need to be very patient. Patience is a virtue but in investing, only works if you have time on your side.

For instance, it may make sense for a 25-year-old to implement position trading strategies, but not so much for an 80-year-old investor. Position trading also means that you will have your money tied up in an investment for an extended period, which can cause you to miss out on other opportunities that may arise elsewhere.

Position trading might be a time-efficient strategy, but it is by no means simple. It takes a lot of research and analysis to determine the kind of long-term trend that a market is about to sustain or embark on. There is also the risk that a short-term counter-trend may not be just a pullback in the market but a full-blown reversal.

Best Markets for Position Trading

Position Trading Stocks

Stocks are the default favourite for position traders. And there are many categories of stocks for position trading strategies: growth stocks, value stocks, and dividend stocks.

Growth stocks are companies that are expected to grow their revenues and other metrics at above-average rates. They are typically young start-ups or companies that have a significant edge over their competitors in areas such as technology or patents. In recent years, position investors have been greatly rewarded by holding growth stocks like Amazon and Tesla.

Value stocks are those of companies that are trading well below their intrinsic values. Position traders invest in value stocks hoping that the market will eventually unlock that value.

Dividend stocks are well-established companies that generate stable revenues and routinely share their profits with their shareholders. Dividend stocks can exceptionally be potent in compounding the returns of position traders when the dividends are reinvested in the underlying companies.

Position Trading Commodity Futures

All commodities (Energies, Metals, and Agricultural) are excellent for position trading strategies. Commodity prices are influenced by supply and demand factors. Some catalytic events, such as weather changes or production mishaps, can trigger new long-term price trends in the underlying markets and provide lucrative opportunities for position traders.

Position Trading Index CFDs

Indices are excellent financial assets for position traders. Since they represent baskets of selected stocks, indices are ideal for traders seeking to express a broader bullish or bearish position in the market over the medium or long term.

Position Trading Strategies

Breakout Trading

Breakouts happen when prices move out of defined areas of support and resistance. By ‘breaking out’ of the levels that contained price, it may be a signal that a new strong trend has started, and position traders may ride it from the very beginning. For instance, during the COVID-19 pandemic, shares of the communication technology company, Zoom, broke the $100-price barrier in March 2020 and embarked on a strong rally that topped $550 by October 2020.

Support and Resistance

Support and resistance levels represent areas of interest where an asset’s price may face changes in demand and supply. The strategy is to buy near support and sell near resistance. Position traders focus on long-term support and resistance levels that have historically remained valid in an underlying market. For instance, the 30,000-price area has been very defining for the Dow Jones index in recent years – initially providing solid resistance and currently being a strong area of support as of June 2022.

Moving Averages

Moving averages smooth out price action and are excellent indicators for showing the prevailing long-term trend in an underlying market. Position traders typically watch 20-day, 50-day, and 200-day moving averages to highlight long-term trends in the market.

Final Word

Position trading is an effective strategy to identify major trends in the market and ride them out for the long term. Visit the AvaTrade education centre and learn more about position trading and other practical trading strategies. Open a demo account for practicing your trading techniques and a live account when you are confident in your trading knowledge and skills.

FAQ

  • What Is Position Trading?

    Position trading is a strategy that involves holding trade positions for an extended period, usually several months or even several years.

     
  • What Is A Good Strategy For Position Trading?

    There are several strategies ideal for position trading. Some include support and resistance, breakout trading, and using moving averages.

     

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** Disclaimer –While due research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.