How Does Position Trading Work?
Position trading is a futures trading strategy that involves holding a position for a long time (usually weeks or months) in order to make money. When trading positions, a trader often considers the long term and maintains the position for an extended length of time, regardless of short-term fluctuations.
Both long (purchasing the asset first) and short (selling the asset first) positions are possible. This type of trading is also known as trend following, and traders typically start trading positions based on long-term charts (weekly, monthly). It is very simple for a trader to recognize and implement trading strategies while adhering to good risk management rules once they have a solid understanding of market trends.
Illustration of Futures Position Trading
The steel business is one recent example of a real-world example of short or long position trading. Following China’s massive pollution-related steel factory closures, steel prices sharply increased and many were forced to close. Since China was the world’s main supplier of steel, this shutdown had an effect on the worldwide steel supply. This trend drove up the price of steel and drove up the cost of steel makers that were outside of China. To profit from this shift, a positional trader would have bought a position in steel stocks outside of China. Over the course of the narrative, which lasted more than a year, this positional trade would have generated large gains.
Utilizing Position Trading
A trader can select his deals according to his skill set even if position trading does not have any established tactics. In general, futures traders are naturally skilled in technical analysis. Nonetheless, some traders go above and beyond to master fundamental research, utilizing both technical and fundamental analysis to generate profits from trading. One might employ the subsequent tactics in position trading:
The Technical Approach
A technical strategy only makes use of charts to ascertain the asset price’s long-term trend. Trades begin when the asset price exhibits long-term trend behavior. Generally, it analyzes the asset’s price, volume, and relative strength. This trading is entirely based on price movements; no fundamental reasons are taken into account.
The Fundamental Approach
A fundamental approach places greater focus on the underlying elements influencing an asset’s price. The strategy searches for a structural change in the underlying business environment and solely takes into account qualitative factors. The trader may operate with far more confidence when using this approach as opposed to trading only on technicalities, which is one of its main advantages.
The Techno-Fundamental Approach
Technical and fundamental analysis are used by a fundamental-techno approach in core position trading to inform trading choices. Charts are used to examine price behavior and confirm fundamentals in order to assess long-term qualitative changes. The trade executes if the price changes in line with the shift in the fundamentals. Technical and fundamental screeners are typically used in these systems to assist filter potential trading bets. When creating strategies, traders can create rules for entry, exit, and stop-loss. When starting to trade, traders should also take their capital basis and level of market expertise into account.
Position traders employ stop losses and capital allocation guidelines as risk management tactics to avoid losing everything in volatile market situations. Other techniques often have narrow stop losses, but position traders are free to maintain large stop losses to account for cyclical changes in asset prices and markets.
Risks of Position Trading
The following list includes some of the typical dangers associated with trading positions in futures, stocks, commodities, and currencies.
- If a trader is unable to predict a quick shift in trend, position trading can result in significant losses.
- In periods of abrupt drops in asset values, leveraged trades have the potential to completely deplete a trader’s cash.
- Failing to take asset allocation guidelines into account can cost traders a lot of money.
- During protracted market runs, a lot of traders lose control and fail to reduce their position even when they see several warning signs. It increases the risk to their capital.
Pros of Position Trading
The idea of in-core position trading has some benefits and drawbacks. Let’s examine the benefits first.
- Because position trading has a longer time horizon than swing or day trading, it is less dangerous.
- Positional trading is a more robust method since it makes use of both technical and fundamental analysis.
- The majority of large assets fluctuate overnight, and position trading allows one to profit from these shifts.
- Compared to swing or day trading, position trading necessitates a lower level of ongoing trader commitment.
Cons of Position Trading
The following are some drawbacks of position trading in futures, stocks, and commodities:
- Unlike other trading tactics, position trading necessitates long-term capital for both novice and experienced traders.
- Many technical analysts lack the ability to analyze the asset fundamentals, which is a necessary talent for position trading.
- Because stop losses in position trading are larger than in other trading techniques, errors come at a higher penalty.
- The ideal conditions for position trading are trending (up and down) markets. Positional trading in a sideways market does not provide gains.
- The trader is exposed to dangers related to liquidity and the capital is locked up.
The Bottom Line
Trading is a high-risk endeavor, and before experiencing meaningful market success, traders must educate and put themselves through testing. Additionally, position trading is similar. To learn position trading, one needs to invest a significant amount of time in tracking, interpreting, and analyzing market moves. Finding patterns in historical data is the most effective method of learning position trading.
