Position trading is a trading strategy that focuses on holding positions in securities like stocks, currencies, commodities or cryptocurrencies for an extended period of time ranging from a few days to several months. Unlike day trading which aims to profit from short-term intraday price movements, position trading targets longer term trends that play out over weeks, months or longer.
Position traders utilize various technical analysis tools and indicators to identify potential entry points for new positions based on signals that a security’s price may be at the beginning of a new uptrend or downtrend. Once in a position, traders will actively manage their holdings by adjusting protective stop losses as the market moves in their favor, taking some profits off the table as targets are reached, and re-evaluating the indicators to ensure the overall trend remains intact. Position traders are less concerned with short term volatility and daily price fluctuations, instead focusing on the overall direction of a security’s price movement over the medium to long term. By identifying trends early and riding them out as they develop, position traders aim to generate consistent profits from holdings that are in their portfolio for extended periods rather than just intraday. This contrasts with day trading which requires constant attention and management of very short term positions.
Some key advantages of position trading include lower stress and time commitment compared to day trading since positions do not need to be monitored as closely. There is also no need to sit in front of screens all day. By giving trades more time to work in their favor, position traders can potentially benefit from larger price moves over weeks or months rather than just hours or days. The longer time horizon also allows for the smoothing out of short term volatility and noise in the markets.
Of course, position trading is not without risks either. Since positions are held for longer, there is increased exposure to unexpected news events or market reversals that could turn profits into losses. Traders must have strict risk management disciplines and money management plans in place to control drawdowns and limit losses on positions that do not work out as intended. Position sizing is also important to balance risk versus returns on each individual trade. When done strategically using technical analysis tools and following sound risk management principles, position trading offers traders an alternative approach to profit from the markets that has potential benefits over short term day trading but also requires its own unique set of skills and discipline to implement successfully. In the following sections, we will explore in more depth how to develop a robust position trading strategy and what types of markets and securities may be best suited to this approach.
How Does Position Trading Differ from Day Trading?
While both position trading and day trading can involve the same financial instruments like stocks, currencies or commodities, there are some key differences in their objectives and approach:
- Time Frame: Day trading focuses on very short term intraday price movements, with positions typically held open from minutes to hours at most. Position traders take a longer term outlook, looking at trends that may play out over weeks, months or longer.
- Technical Analysis Tools: Day traders primarily use shorter time frame charts like 5-minute and hourly charts to spot short term patterns and reversals. Position traders analyze daily, weekly and monthly charts to identify potential entry points for trades aligned with a market’s prevailing trend.
- Trade Frequency: Due to the very short holding periods, day traders may place dozens of trades in a single day. Position traders are aiming to ride out just one or two trades at a time and do not usually day trade in addition to their longer term holdings.
- Risk Management: With positions held open for mere hours, day traders focus on tight stop losses to cut losing trades quickly. Position traders utilize wider stops or trailing stops that give trades more room as they develop over weeks.
- Profit Targets: Day traders scalp small, consistent profits on numerous trades. Position traders are targeting larger moves over time, taking partial profits while also letting winners run further.
- Market Impact: Day traders try to enter and exit positions without moving the market price against themselves. Position traders have less concern about short term market impact since they are not actively trading in and out of many positions intraday.
While both can be profitable trading styles, day trading requires much more active management of very short term positions while position traders take a more relaxed, buy and hold approach aligned with major trends as they unfold over longer time periods.
Technical Analysis and Trading Indicators for Position Traders
To be successful with a position trading approach, it is important to have a set of technical analysis tools and indicators that can help identify potential trading opportunities aligned with the prevailing trend. Some commonly used technical indicators for position traders include:
Moving Averages: Simple, exponential and weighted moving averages are among the most basic yet effective indicators for determining trend direction and support/resistance levels on charts. Crossovers of short term averages above or below longer term averages provide signals for entries and exits.
MACD (Moving Average Convergence Divergence): This popular momentum oscillator measures the difference between two exponential moving averages to identify trend changes earlier than basic crossovers. Divergences between the MACD and price can also signal potential reversals.
Stochastic Oscillator: Measures the current closing price relative to the price range over a period of time and produces values that oscillate between 0% and 100%. Readings below 20% or above 80% indicate an asset may be oversold or overbought respectively.
Bollinger Bands: Plots an upper and lower boundary band around a simple moving average based on standard deviation. When prices touch the upper or lower bands, it can foreshadow an impending trend reversal. Band width contractions also signal reduced volatility before a potential large move.
Ichimoku Cloud Charts: This comprehensive indicator incorporates multiple time frames and metrics to visually depict support and resistance levels as well as trend direction and momentum. It provides an “at-a-glance” view useful for position traders.
By combining several of these indicators, position traders can objectively determine high confidence entry signals that increase the odds of catching a larger move in the direction of the prevailing trend. Oscillators also help identify trend exhaustion points for potential exits.
Developing a Position Trading Strategy
With an understanding of technical analysis tools and indicators that can help uncover trading opportunities, the next step is to develop a defined position trading strategy. This includes determining aspects like:
Preferred Time Frame: Will you primarily focus on daily, weekly or monthly charts? Higher time frames mean fewer signals but opportunities for larger moves.
Rules for Entries: What indicator combinations or patterns will you look for as valid entry signals aligned with the trend, such as a crossover of moving averages or MACD divergence?
Initial Position Sizing: How will you determine the appropriate percentage of your account to risk on each trade? 1-2% per trade is common for position traders.
Hard Stop Loss Levels: Where will you place protective stops to cut losses quickly if the trade moves against your position? Trailing stops can also be used.
Profit Target Levels: At what predefined price levels will you take partial or full profits, such as 20-50% retracements of a previous trend move?
Position Management: How will you actively manage winners by trailing stops or taking partial profits? And how will you re-evaluate losers by adjusting stops or exiting?
Portfolio Allocation: How many positions will you hold at once and within what market sectors for diversification? No more than 5-10% of capital per trade is typical.
Having predefined rules and guidelines on all of these aspects before entering the market is important for objective, emotions-free position trading. Backtesting the strategy on historical price data can also optimize the rules and gauge its potential performance. With a proven strategy and approach, traders can then confidently spot and act on new trading opportunities as they arise.
Suitable Securities for Position Trading
While any market that can be analyzed using technical analysis tools – including stocks, forex currency pairs, commodities, indices or cryptocurrencies – has potential to be traded using a position trading approach, some may be more suitable than others based on their typical behavior and characteristics:
Forex Majors: Currency pairs involving the US Dollar, Euro, British Pound and Japanese Yen tend to demonstrate clear trends over weeks or months due to large capital flows. Lower volatility also means wider stops can be used.
Blue Chip Stocks: Large, established companies leading their industries often move in long term cycles over years. On the shorter time frames traders focus on, technical analysis still applies well to identify intermediate term trends.
Commodities: Hard commodities like gold and oil are highly influenced by macroeconomic factors and seasonality. Their long term cycles combined with periodic “spikes” provide opportunities for position traders.
Index ETFs: Exchange traded funds tracking the S&P 500 and other major indices demonstrate clear long term uptrends, with pullbacks that allow re-entries. Lower risk than individual stocks.
Lower Volatility Cryptos: While most cryptocurrencies can whipsaw violently, more established coins like Bitcoin still trend over weeks or months between major swings. Careful risk management is a must.
Sectors Not Individual Stocks: Position trading broad market sectors minimizes company-specific risk compared to holding single equities over long periods.
In general, less volatile assets exhibiting clear trends are best suited for the position trading approach. High-risk, small-cap stocks prone to large daily swings may be challenging to trade this way and require more experienced position traders.