What is position trading, and how does it work?

Out of the wide range of trading strategies, position trading is one with the longest period. Position traders hold trades for at least several weeks. Therefore, this method requires patience, time, and significant funds. For instance, Philip Fisher, a famous position trader who Warren Buffet followed, opened a buy position on Motorola stocks and held it open until he died in 2004. 

Keep reading to discover whether it’s worth waiting for returns for years. 

Position trading: definition

Day trading risk management strategies

Position trading is an approach that implies opening long and short positions on assets and holding them for weeks, months, and even years. Trades are open on high timeframes, including daily, weekly, and monthly. Position traders focus on long-term trends only. The main challenge is to determine a long-term trend. Indicators with standard settings and candlestick patterns won’t work. 

How to open a successful position trade

To determine a long-term trend’s direction, you need to conduct a comprehensive analysis.

Three timeframes

This rule applies to any trading approach. Before opening a position, you need to analyze smaller and larger timeframes. For instance, if you plan to open a trade on a weekly timeframe, you should check an entry point on a daily chart and determine a longer-term trend on the monthly chart. 

Support and resistance levels

Support and resistance levels are vital for any trade. They determine when a price may turn around. In position trading, these levels allow traders to identify entry and exit points as well as where to take profit partially by applying a trailing-take-profit tool.  

The key indicators you can use to set support and resistance levels are a Fibonacci retracement and a moving average. The Fibonacci retracement determines the levels based on the previous trend. Moving averages with long-term periods can determine entry and exit points via crossovers and by themselves.   

You should use trend indicators instead of momentum ones to determine long-term trends. Oscillators can be applied when defining entry and exit points.

Historical data

How pro traders use trendline trading strategies

Historical price movements work best for long-term trades. As trends change around, you can find similar price fluctuations in the past to predict how the price may behave this time. To determine similar price movements, you need to compare current and previous fundamental factors. 

Combine fundamental and technical analysis

Although some position traders ignore the news if they don’t affect an asset’s value in the long run, fundamental analysis is an essential part of position trading. Usually, an asset reacts to certain events in the same way. Fundamental analysis allows for determining similar market conditions that can lead to specific price movements.  

Position trading: pitfalls

  • Significant funds. To maintain a position for an extended period, you must have a large account balance to avoid a margin call. 
  • Not profitable in highly volatile markets. You should avoid highly volatile markets when you plan to hold a trade for a long period. When a price changes its direction constantly, you can’t predict its direction correctly. Highly volatile markets are suitable for short-term trades only. 
  • Risks of trend reversals. Experienced traders use trailing take-profit orders to lock returns they gain while a trade is open. Otherwise, the market may turn around, so they may miss a good exit point. 
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Position trading vs. investing

Rational choice theory: origin, explanation, and examples

Position trading can be confused with investing, as both approaches rely on an asset’s long-term value. However, when investing, you buy an asset and hold it until its value rises so you can sell it with a large income. In position trading, you can buy and sell. If you buy, you wait for the asset’s price to appreciate. When you sell, you expect the asset’s value to depreciate.

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Takeaway

Position trading may be even less risky than shorter-term trades, as a trader doesn’t consider short-term fluctuations that usually affect traders’ decisions. Still, position trading requires experience and analytical skills to identify a strong trend and enter it at the best point.

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