Position trading

Position trading

You're probably a medium- or long-term trader if you’re looking to generate returns from a few positions that deliver high profits. There are lots of trading strategies that suit longer-term traders, but here we’re going to focus on one of the most common: position trading.

What is position trading?

Position trading is a strategy that involves opening a low number of trades, with the aim of delivering healthy gains over the long term. It forms the basis of traditional investing – but is used by many leveraged traders too.

Name:   Position trading

Timeframe: Medium to long term

Finds trades using: Mostly fundamental analysis

Requires: Patience, cool temperament

A common trade using this strategy would be to buy a currency that you believe is going to grow over the coming months and years. You wouldn’t realize any profits from the opportunity for a long time and might target a return of 10% or more. Hunting for such wide profit margins can mean taking on more risk from each trade.

Forex traders, of course, can short markets as part of their position strategy. To do so, you’d need to find a currency pair that you believe will depreciate over a long period.

You’ll also need to ensure that you have sufficient margin in your trading account to cover any adverse movements in your chosen market. Some negative price action is likely when you’re keeping trades open for such long periods.

How do position traders find opportunities?

If you’re considering position trading, you’ll need to identify trades that offer a large amount of potential upside over a long period. Most position traders will do this using fundamental analysis, examining the facts and figures surrounding each market to try and find underpriced assets.

Even when your trade is a success, it may take some time for those assets to return a profit –, and you may see some turbulence along the way. For this reason, position traders need to have a cool temperament and a lot of patience.

Position trading strategies

As with most approaches to trading we’ve covered here, position traders can utilize a huge range of different trading strategies to target profits. Let’s examine two: carry trades and trend trading.

Carry trades

The carry trade is a popular trading strategy in the forex market for position traders, using interest rates to target long-term returns.

The first step in putting together a carry trade is to find a currency that offers a high-interest rate and another that offers a lower interest rate. You then sell the low-rate currency while buying the high-rate currency – taking advantage of the difference in rates to make a profit.

For example, say the Bank of Canada has set a rate of 1.25%, while the ECB has set a rate of 0.00%. So, if you sell EUR/CAD, you should (in theory) profit from the 1.25% difference in rates.

Of course, you’ll need to earn enough profit to offset the costs of borrowing EUR and be wary of fluctuations in the EUR/CAD exchange rate itself, which could offset any gains from the interest rate differentials.

Trend trading

We’ve already encountered trend trading in this course – but it can work just as well for long-term positions as short ones.

However, you’ll need to identify some major forex trends if you’re going to make the profits required for a successful position trading strategy. So, you’ll probably want to employ a mix of technical and fundamental analysis, then wait until a trend is definitely underway before opening your trade.

Stopping losses and taking profits can be a handy way of ensuring that your position doesn’t incur excessive losses when you’re not monitoring the markets. Remember, FX markets are open 24 hours a day, so your trades will still fluctuate while you sleep.

Even when your trade is a success, it may take some time for those assets to return a profit –, and you may see some turbulence along the way