Interested in breaking into trading? Are you the kind of trader who is patient, discerning, and knows how to strike while the iron is hot? Then position trading is a good fit for you. While many other styles of trading have short holding times (scalp trading and day trading never hold overnight positions) position trading is a long-term investment strategy where you hold for months to years at a time. If you’re looking to develop a position trading strategy, here’s what you need to know.
The Basics of Position Trading
Of all the trading styles, position trading most closely resembles investing, particularly buy-and-hold investing. The difference is that while buy-and-hold commonly only involves long trades, position trading can make use of both short and long trades. With both concepts, short-term market fluctuations are typically of little concern, as you stand to gain the most profit from long-term market trends.
More often than not, you’ll be using fundamental analysis to assess trends for your trades, but you may end up incorporating technical tools to supplement your findings. There are two primary advantages to position trading. The first is your ability to benefit from interest earned on your trades. The second is the potential for you to reap the benefits of the correlations you spot between currency and alternative financial tools.
Finding Your Initial Trade
Finding your first trade to make is a time-consuming process no matter what strategy you use, and position trading is no exception in. The main component of any form of position trading is to find a trend or to predict one. In the former scenario, you’ll be acquiring assets that have already begun trending and monitoring your position over time. In the latter, you’ll be looking for trades and assets that have strong trending potential but haven’t trended thus far.
Forecasting a trend is a time-intensive process that requires a lot of research and analysis. You’ll want to compare historical data for similar assets to see the trending potential of your trades. There’s a fair amount of risk involved, as there’s never any guarantee that an asset is going to trend. Even if one does, it may not be for any significant amount of time. This is why most position traders opt to select their trades based on the current market trends. It requires less time, effort, and risk—but it, in turn, may give less reward, depending on the asset.
As with any trading strategy, a fundamental goal to keep in mind is to “buy low and sell high.” This applies to position trading as well, though you have to have a keen eye for trends so you’re able to effectively ride the market waves. To start with position trading, you’ll need to have three components in place: an entry, an exit, and your controlled risk.
Many financial advisors recommend buying a trade when it crosses above a 40-week moving average. You’ll then hold this position until the trade crosses back below that 40-week moving average. Upon the initial placement of the trade, you’ll use a stop loss to cap the amount that could be lost if your trade should then move in an unfavorable direction. Where that stop loss is placed will vary from trade to trade, but a good figure is typically around 5 percent below the moving average, which will protect your investment while still allowing for the potential of an upside. It’s a safe bet when conducting your first position trade.
Find Your Niche
At the end of the day, position trading isn’t a strategy that works for everyone. Some people prefer the faster pace of day trading, and others are looking to quickly turn their trades around. However, if you have a keen eye for forecasting trends and are willing to be patient and do your research, you’ll have great potential when it comes to profiting off of your trades. Start off small and see where position trading could take you!