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Position Trading: How Forex Traders Use Positions

   

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Within the forex market, there are traders known as position traders (sometimes referred to as “buy and hold” traders), who take positions for the long term. They base this on long-term charts and macroeconomics, and they operate in pretty much every market there is—including the hyperactive forex market. 

Considering how the popularity of position trading is growing, it’s worth putting this market approach under the microscope. Here’s a look at the details behind position trading, along with how common traders use positions.

The Appeal of Position Trading

The key to position trading is taking a position in a currency pair, commodity, or index that is expected to have a major trend. These traders don’t concern themselves with minor things such as pullbacks or price fluctuations. Instead, they aim to capture the majority of the trend, ideally via trends that can run for weeks, months, or possibly even years in certain instances.

The major draw to this market outlook is that it doesn’t require much activity or time on the trader’s part. All that’s required is initial research; once the position trader decides how to trade the commodity, they enter that trade, after which there’s nothing really left to do. They monitor the position on the off chance of a significant change, but because small fluctuations in price aren’t a big deal, there is minimal monitoring or maintenance needed for the position.

Position trading is different from day trading and doesn’t require traders to spend as much time actively watching the market. Swing trading is another popular option, but although it’s slightly less active than day trading, it still requires near-constant monitoring and moving of positions every week.

Position traders often make a nominal number of trades over the course of a year, keeping to only critical moves rather than a chop-and-change approach. Swing traders make hundreds of trades, whereas day traders make thousands upon thousands of moves every single year.

Top Indicators for Position Trading

Because of the long-term approach position traders are using to identify trades, technical indicators typically do not play a significant role in identifying trade opportunities. Rather, traders are more interested in economic information such as inflation, unemployment rates, and other factors that affect currency values over a long period of time.

However, indicators can still be used to evaluate trade potential, especially when you’re using information based on historical data. When using indicators, it’s always important to view them within the larger context of a currency pair’s price movement over time. In the EUR/NZD chart below, for example, the pairing shows a steady three-month decline in value, which sets up nicely for position traders looking to cash in on the pairing’s long-term recovery:

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Here are three examples using EUR/NZD to illustrate these indicators in action.

50-, 100-, and 200-Day Simple Moving Averages 

A simple moving average (SMA) is an easy-to-read indicator that offers value when adding historical context to a currency pair’s price movement. By using longer time frames with your SMA, you can identify oversold conditions that represent a good time to open a position.

In the EUR/NZD chart below, the pairing’s price dips below each of the 50-, 100-, and 200-day charts, underscoring the historic price movement that has taken place—and potentially signaling an excellent entry opportunity for position traders:

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Within the forex market, there are traders known as position traders (sometimes listed as “buy and hold” traders), who take positions for the long term. They base this on long-term charts and macroeconomics, and they operate in pretty much every market there is—including the hyperactive forex market. 

Considering how the popularity of position trading is growing, it’s worth putting this market approach under the microscope. Here’s a look at the details behind position trading, along with how common traders use positions.

When combining them with long-term trends and other economic data, traders may use these SMAs to open a new position.

Moving Average Convergence/Divergence

Moving average convergence/divergence (MACD) represents the difference between the 12-day exponential moving average (EMA) and the 26-day EMA. It’s a simple visual tool that can help you identify trade opportunities: Whenever the MACD crosses the “signal line” display in orange on a histogram, it signals a buy opportunity.

On the EUR/NZD chart, notice how the MACD line tends to cross above the signal line at moments when the pairing’s price spikes:

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MACD does not necessarily correlate to long-term trends because the time frames used by this calculation top out at 26 days. But like other indicators, it can help identify potential trending action when placed into context with other external factors.

Bollinger Bands

Bollinger bands are based on the simple moving average, and they typically represent price values two standard deviations above and below the SMA. Typically, the SMA is a 20-day average, but traders can adjust this to account for more historical data when considering a long-term trade.

Bollinger bands are best used in conjunction with other indicators when you’re planning out position trades. One of the best things to look at is the spread between the two outer bands, which correlate to volatility. When the space between these bands narrows, as it does close to the end of the chart below, it can signal a period of consolidation that precedes volatility: 

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Because position traders are looking for long-term opportunities, imminent volatility isn’t necessarily important. But when used with MACD and SMAs, it can help strengthen your confidence in when to open a new position.

Seeking Out Position Trades

There are plenty of approaches when it comes to position trading, which opens the doors to traders of all skill levels. These approaches include buying commodities with strong potential before they start trending, and buying assets that have already started to trend. Buying assets that are already trending involves less research and, thus, is favored by many established position traders, although it comes at the cost of some potential earnings—because you miss out on the initial price movement at the beginning of the trend.

Locating a trend is the main event for a position trading effort, because that is what will hopefully lead to a profit. This usually excludes any assets that trade within a range, unless that range is large, spanning years. This kind of span suits the position trader well, because it could take months or even years for the price to shift between each side of the range.

Take a look at the chart below, which shows the USD/CAD pair breaking through a line of resistance and then holding a line of support. For position traders, this indicates the potential for a long-term breakout, with hopes of a return to that line of resistance, leading to a profit. A trader might choose to open a position during the period of consolidation prior to a future breakout, with a stop-loss order placed below the line of support:

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For another example, take a look at this EUR/USD chart, which shows a head-and-shoulders pattern in which the price breaks above the trend line. Position traders would identify this as a sign of a potential breakout and consider opening a position before the movement takes place:

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Now, take a look at a potential short setup. In this USD/JPY chart, there’s a clear trend line that shows a weeklong decline in value, as well as a break through multiple levels of support. Following a brief gain in value, the chart pattern points to a continuation of that trend, and potential profits to be earned from shorting this currency pair.

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As the green and red fields illustrate, the potential for a significant downward trend is much greater than the potential costs if the price rebounds in value, reaching your stop-loss and triggering a sell. 

When you’re evaluating currency pairs to identify trends that are suitable for opening a long position, moving averages are one of your most reliable data points. In the USD/JPY chart above, two moving averages covering different time frames are displayed along with the candlestick chart for the currency pair. In this case, both moving averages suggest a downward trend, which makes a strong case for a short position.

Other technical indicators are worth referencing in your evaluation of a potential position. The relative strength index (RSI), for example, can tell you whether a position is overbought or oversold. The typical range for normalcy is 30-70. If the RSI of a position dips below 30, it generally means the position is oversold, and the price of the pair is likely to go up. If the RSI goes above 70, it means the position is overbought, and the price is likely to decline.

You may also find value in technical indicators such as the stochastic oscillator, which can be found and analyzed on trading platforms such as MetaTrader 4 or MetaTrader 5.

Trends usually start by breaking away from a range. Excusing the rather basic analogy, the price becomes like a spring—squeezed by the non-trending pattern and then exploding when it breaks out—meaning that it can trend for quite some time. This is particularly obvious if the pattern takes place over a year or more, because it can then trend for a year or longer after a breakout. Chart pattern ranges—such as head and shoulders, cup and handle, triangles, and more—can hint that a trend is going to commence or re-emerge.

An example of this was the US30. In 2015 and the first half of 2016, it was stuck in a range. After a breakout in the middle of 2016, it experienced a strong 18-month uptrend.

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Adopting a Basic Position Trading Strategy

A position trade can be locked in for an extended span of time. However, it does require three elements in order to be completely successful: 

  1. A preplanned entry
  2. A preplanned exit 
  3. A controlled level of risk 

Miss any of these elements, and your position trading strategy could fall apart. 

It sounds rudimentary, but any effective position trading strategy will include the elements mentioned above, after which you hold the position until a weekly price bar closes below the 200-day or 40-week moving average. When you place the trade initially, a stop-loss is in effect, capping the cash that is written off should it shift in a questionable direction immediately. 

For example, setting up a stop-loss that is—at minimum—5 percent under the moving average should protect your capital while still allowing for potential growth.

The Limits and Risks of Position Trading

There is one major concern when it comes to position trading, and it can’t be easily overlooked: Minor fluctuations that are ignored can become full trend reversals and result in significant losses, especially if the trader doesn’t watch the position or simply doesn’t put a trailing stop or general stop-loss order in place to protect their capital. This can, however, work in the favor of the trader, because the position may also generate a profit when they’re not monitoring it.

Unlike swing or day traders, whose positions are consistently transferred into withdrawal cash, position traders essentially lock up their capital for long time frames. Make sure that you won’t need the capital in the meantime, because liquidation can compromise the strategy of position traders.

Compounding effects are also relatively nominal when it comes to trading positions. Profits aren’t often locked in, and the balance of the account doesn’t actually grow until the position closes in the green, months or years down the road. Generally, position trading is the slow and steady approach to forex trading, but it is like other strategies in that it has both pros and cons.

Conclusion

There is no “best” trading style per se—they are all different, and it depends on the personality and situation of the trader. Position trading is ideal for those who want to put in a bit of research initially and do little once the trade is placed. These kinds of trades are applicable in practically all markets, so in a way, position trading is an approach that carries a fair amount of flexibility. 

Trades are heavily based on technical analysis, macroeconomic data, and indications that a currency could trend or is already trending. Overall, position trading has plenty of major advantages, but if you do undertake it, prepare to be involved over the long haul.

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Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.

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