We hope you are ready for another lesson delivered to you by Trading Top Ten!
Today, we discuss a long-term trading strategy that may sometimes be confused with other forms of Investing! We trust, that our introduction will shed some more light on what Position Trading is, how is it different from investing and any other trading strategies.
So What is Position Trading?
Position Trading is a strategy that focuses on the long term view, with positions being opened for an extended period. To put it simply, you are looking to identify a strong trend on a higher timeframe, such as Daily, Weekly or Monthly. Once identified trader opens a position: buy for an uptrend, sell for a downtrend. With Position Trading, you usually are not concerned about any ‘noise’ or short-term price fluctuations you may see on smaller timeframes as you will hold your position over the next few weeks, months or even years!
Position Trading is indeed very similar to Investing. Both approaches require you to analyse the assets you are going to trade/invest and both require you to hold open positions for an extended time. When Investing your expectation is that the price of an asset you bought will appreciate over time! Unlike investing, when you are a position trader you can profit from both bullish and bearish trends (if and when identified correctly) of the assets you are trading.
What to Trade?
It should not come as a surprise that some markets are better suited for Position Trading. Generally speaking, Forex or Cryptocurrency markets are very volatile and there are other strategies, such as scalping, day or swing trading that yield better results overall.
Less volatile markets, that have strong and clear trends are the best for Position Trading. These markets include stocks, commodities and indices.
How to Position Trade?
Position Traders combine both technical and fundamental analysis when deciding on their next trade. Combining the fundamental analysis of economic conditions (such as interest rates, inflation, unemployment, etc.) with the technical indicators provides traders with a better picture of the asset they are analysing and allows them to decide on their next move!
From a technical perspective, traders tend to focus on Moving Averages, Support and Resistance Levels and, of course, Trends!
Position Traders consider moving averages (both simple and/or exponential), as one of the best and most powerful indicators for their analysis. The most common ones are:
● Short-term moving average - 50-day (faster reacting)
● Long Term moving average - 200-day (slower reacting)
The moving average is always looked at a higher timeframe as it usually provides the best overall picture of the current trend. Quite often, the 200-day moving average would also act as dynamic support or resistance.
The crossovers of these 2 moving averages also indicate the market trend. When the faster reacting MA (50-period) crosses above the slower reacting MA (200-period), it may indicate an upcoming bullish trend. On the other hand, if the 50-period MA crosses below the 200-period MA, it may indicate an upcoming bearish trend!
Support and Resistance levels on higher timeframes (such as weekly or monthly) are another tool that is used by Position Traders. These levels are generally considered to be very strong. Traders may look at them when deciding on their entry/exit levels.
Position Traders expect that these historically strong levels will not be broken and would be looking to enter a buy at support levels and sell at resistance expecting a new trend to emerge.
Position Trading is all about following clear and strong trends on higher timeframes. As such, their Stop Loss levels have to be big enough to give enough room to move and cancel out all the noise the asset may experience on lower timeframes - whether it is due to weaker support/resistance levels, news releases or short-term swings.
When trend trading, you also can use a pyramid strategy to keep entering more positions and to make even further profits. Make sure to check our last lesson, where we discussed trend trading in greater detail!
Some Position Traders will also focus on trading breakouts. Traders decide to take increased risks (of fake breakouts) to enter a position early and capture the breakout! As discussed in the previous lesson, trading breakouts is very risky! Always stick to your risk management.
A very common way for Position Traders to increase their profits is to open more positions in the same direction as the original trade - thus boosting the profits of the winning trades as they move in your desired direction. This is commonly known as pyramiding.
The Key to Position Trading
Position Trading is relatively straightforward as mainly focuses on trend-following strategies. However, there are certain habits or ‘secrets’ that can help you become more profitable. These include:
1. Always stick to your risk management and if you were wrong, cut your losses early but if you are right, make sure you let your winners run - this may include pyramiding.
2. If you’re new, focus on one or two markets only. Take your time to learn how to spot a trend and to better understand the fundamentals around the stock, commodity or currency pair. It’s always about quality and not quantity.
3. Use a Trailing Stop Loss (TSL) once in Profit! Remember, to leave enough ‘breathing’ space for the TSL, so you don’t close out too early and you can ride out the trend to the maximum!