Position Trader Definition, Strategies, Pros and Cons

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What Is a Position Trader?

A position trader buys an investment for the long term in the expectation that it will appreciate in value. This type of trader is less concerned with short-term fluctuations in price and the news of the day unless they alter the trader's long term view of the position.

Position traders might be seen as the opposite of day traders. They do not trade actively, with most placing fewer than 10 trades in a year.

Understanding the Position Trader

Position traders are, by definition, trend followers. Their core belief is that once a trend starts, it is likely to continue for some time.

Key Takeaways

• Position traders are trend followers.
• They identify a trend and an investment that will benefit from it, then buy and hold the investment until the trend peaks.
• The successful position trader identifies the right entry and exit prices in advance and controls risk using stop-loss orders.

A distinction can be made between position traders and buy-and-hold investors, who are classified as passive investors and hold their positions for even longer periods than do position traders. The buy-and-hold investor is building a portfolio of assets for a long-term goal, such as retirement. The position trader has spotted a trend, made a buy based on that trend, and is waiting for it to peak in order to sell.

This trading philosophy seeks to exploit the bulk of a trend's upwards move. As such, it is the polar opposite of day trading which seeks to take advantage of short-term market fluctuations. In between these two are the swing traders, who might hold an investment for a few weeks or months because they believe it will soon see a price pop.

Tactics for Position Traders

To be successful, a position trader has to identify the right entry and exit prices for the asset and have a plan in place to control risk, usually via a stop-loss level.

A day trader buys and sells within hours or minutes. A position trader buys and holds until a trend peaks. A buy-and-hold investor buys for the long term.

Position traders may use technical analysis, fundamental analysis, or a combination of both to make their trading decisions. They also rely on macroeconomic factors, general market trends, and historical price patterns to select investments which they believe are about to go higher.

A big advantage of position trading is that it doesn't take a lot of time. Once a trade has been initiated and safeguards have been implemented it's a matter of waiting for the desired outcome.

The main risk is that minor fluctuations that a trader chooses to ignore can unexpectedly turn into trend reversals. Another drawback is that it ties up money for a prolonged period of time, possibly causing opportunity costs.

Is Position Trading for You?

All investors and traders must match their trading styles with their personal goals, and each style has its pros and cons.

The first consideration is the reason you are investing in the first place. Are you building a nest egg for the future? Do you plan to make a living by trading? Or do you simply enjoy dabbling in the market and want to own a piece of a company? And how much time do you want to devote each week or each day to tracking your portfolio?

Position trading is ideally suited to a bull market with a strong trend. It doesn't lend itself easily to a bear market. In a period in which the market is flat, moving sideways, and just wiggling around, day trading might have the advantage.

Position trading is the longest-term trading and can have trades that last for several months to several years!

Position traders ignore short-term price movements in favor of pinpointing and profiting from longer-term trends.

It is this type of trading that most closely resembles &#;investing&#;. The crucial difference is in markets outside forex, &#;investing&#; usually means you hold positions that are long.

This kind of forex trading is reserved for super PATIENT traders and requires a good understanding of the fundamentals.

Because position trading is held for so long, fundamental themes will be the predominant focus when analyzing the markets.

Fundamentals dictate the long-term trends of currency pairs and it is important that you understand how economic data affects your countries and their future outlook.

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Because of the lengthy holding time of your trades, your stop losses will be very large.

This means that your losses can end up being huge, but it also means your profits can be yuuuuge (&#;huge&#; in Trumpglish).

You must make sure you are well-capitalized or you will most likely get

You must make sure you are well-capitalized or you will most likely get margin called

For an idea of how much money you should have in your trading account, check out our risk management lesson.

Position trading also requires thick skin because it is almost guaranteed that your trades will go against you at one point or another.

These won&#;t just be little retracements either.

You may experience huge swings and you must be ready and have absolute trust in your analysis in order to remain calm during these times.

Types of Position Trading

You may experience huge swings and you must be ready and have absolute trust in your analysis in order to remain calm during these times.

While fundamental analysis plays a much larger role for position traders, that doesn&#;t mean that technical analysis isn&#;t used.

Position traders tend to use both fundamental and technical analysis to evaluate potential trends.

Here are some trading strategies utilizing technical analysis that position traders use:

Trend Trading using Moving Averages (MA)

The 50-day moving average (MA) and 200-day moving average (MA) indicator is a significant technical indicator for position traders.

The reason for this is due to the fact these moving averages illustrate significant long-term trends.

When the 50-day MA intersects with 200-day MA, this signals the potential of a new long-term trend.

When the 50-day MA crosses below the 200-day MA, it is known as the &#;Death Cross&#;.

When the 50-day MA crosses above the 200-day MA, it is known as the &#;Golden Cross&#;.

These longer-term MAs are popular chart indicators for position traders.

Support and Resistance (S&R) Trading

Support and resistance levels can signal where the price is headed, letting position traders know whether to open or close a position.

A support level is a price level that, historically, does not fall below. These &#;historical&#; support levels can hold for years.

A resistance level is a price level that, historically, tends not to be able to break. These &#;historical&#; resistance levels can also hold for years.

If position traders expect a long-term resistance hold, they can close out their positions before unrealized profits start melting away.

They may also enter long positions at historical support levels if they expect a long-term trend to hold and continue upward at this point.

This strategy requires that traders analyze chart patterns. When analyzing the chart, position traders consider three factors when trying to identify support and resistance levels.

1. The historic price is the most reliable source when identifying support and resistance.  During periods of significant up or down in a market, recurring support and resistance levels are easy to spot.
2. Previous support and resistance levels can indicate future levels. It is not unusual for a resistance level to become a future support level once it has been broken.
3. Technical indicators like moving averages and Fibonacci retracement provide dynamic support and resistance levels that move as the price moves.

Breakout Trading

Trading breakouts can be useful for position traders as they can signal the start of a new trend.

Breakout traders using this technique are attempting to open a position in the early stages of a trend.

A breakout is where the price moves outside defined support or resistance levels (preferably confirmed with increased volume).

The idea behind trading breakouts is to open a long position after the price breaks above resistance or open a short position when the price breaks below support.

To successfully trade breakouts, you will need to be confident in identifying periods of support and resistance.

Pullback Trading

A pullback is a short dip or slight reversal in the prevailing trend.

This strategy is used when there is a brief market dip in a longer-term trend.

Pullback traders aim to capitalize on these pauses in the market. 

The idea behind the pullback strategy is this:

• For long trades, to buy low and sell high before a market briefly dips, and then to buy again at the new low.
• For short trades, to sell high and buy low before a market briefly rallies, and then to sell again at the new high.

If executed successfully, a trader can not only profit from a long-term trend but avoid possible market losses by:

1. Selling high and buying the dips (for long trades).
2. Buying low and selling the rips (for short trades).

To help identify potential pullbacks, you can use retracement indicators, like the Fibonacci retracement.

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You might be a position trader if:

• You are an independent thinker. You have to be able to ignore popular opinion and make your own educated guesses as to where the market is going.
• You have a great understanding of fundamentals and have good foresight into how they affect your currency pair in the long run.
• You have thick skin and can weather any retracements you face.
• You have enough capital to withstand several hundred pips if the market goes against you
• You don&#;t mind waiting for your grand reward. Long-term forex trading can net you several hundred to several thousands of pips. If you get excited about being up 50 pips and already want to exit your trade, consider moving to a shorter-term trading style.
• You are extremely patient and calm.

You might NOT be a position trader if:

• You easily get swayed by popular opinions on the markets.
• You don&#;t have a good understanding of how fundamentals affect the markets in the long run.
• You aren&#;t patient. Even if you are somewhat patient, this still might not be the trading style for you. You have to be the ultimate zen master when it comes to being this kind of patient!
• You don&#;t have enough starting capital.
• You don&#;t like it when the market goes against you.
• You like seeing your results fast. You may not mind waiting a few days, but several months or even years is just too long for you to wait.