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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 listed as “buy and hold” traders) that take positions for the long-term. They base this on long-term charts and macroeconomics, and operate in pretty much every market there is—including the hyperactive forex market. Considering how the popularity of position trading is growing, it’s certainly worth putting this market approach under the microscope. The following looks at the details behind position trading, along with how many traders use positions.The Appeal of Position Trading

The key to position trading is taking the 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 like pullbacks or price fluctuation. Instead, they aim for capturing 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, and there’s nothing really left to do. They monitor the position on the off chance of a change, but since small fluctuations in price aren’t a big deal, there is very minimal monitoring or maintenance needed for the position.

This is practically the exact antithesis of day trading, in which traders make moves in the market every single day, spending endless hours actively involved in the forex market. Swing trading is another popular option, but though 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 amount 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, and day traders will make literally thousands upon thousands of moves every single year.

Seeking Out Position Trades

There are plenty of different approaches when it comes to position trading, which opens up the doors to traders of all skill levels. These 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 favorited by a lot of established position traders.

Locating a trend is the main event for a position trading effort, since that is what will hopefully lead you to profit. This usually excludes any assets that trade within a range, unless that range is large, spanning over 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.

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 took 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 handles, triangles, and more, can all hint that a trend is going to re-emerge or commence.

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 18 month strong uptrend.

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Adopting a Basic Position Trading Strategy

A position trade is a trade that can be locked in for an extended span of time. However, it does require three elements in order to be completely successful: one, a pre-planned entry; two, a pre-planned exit; and three, a controlled level of risk. Miss any of these elements, and your position trading strategy could very well fall apart. It sounds rudimentary, but the simple strategy is the one mentioned above, after which you hold that 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—five 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 a pretty significant loss, 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, as the position may also generate profit when they’re not monitoring.

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

Compounding effects are also relatively nominal when it comes to trading positions, as 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 very much the slow and steady approach to forex trading, but it isn’t unlike other strategies in that it has both pros and cons.

Conclusion

There is no “best” trading strategy per se—they are all different, and it depends on the personality and situation of the trader. Position trading is ideal for those that want to put in a bit of research initially and do very little once the trade is actually placed. These kinds of trades are applicable in practically all markets, so in a way it’s an approach that does carry 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 one should 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.

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