Position trading: definition, strategies, and illustrated examples
Position trading is an active trading strategy that involves buying and selling financial products over weeks to months. Long-term trading is designed to ride upward and downward market trends over time.
The position trader seeks the best opportunities and does not shy away from ambitious goals. If their analysis is correct, they hope to earn a lot of money.
Position trading closely resembles the buy-and-hold investing strategy with one crucial difference: Buy-and-hold investors can only go long while position traders go both long and short.
Key Takeaways
Position trading is a long-term endeavor lasting from a few weeks to a few months, longer than swing trading.
Unlike a “buy and hold” investor who may only trade five or 10 times a year, the position trader takes many bullish and bearish positions in the markets over the course of the year.
Position trading exposes the trader to distinctive risks, such as overnight gap risk, when prices change abruptly from one trading session to the next.
Trading exposes you to the risk of losing more than your initial investment and incurring financial liability. Trading is suitable only for well-informed, sophisticated clients able to understand how the products being traded work and having the financial ability to bear the aforementioned risk.
Transactions involving foreign exchange instruments (FOREX) and contracts for difference (CFD) are highly speculative and extremely complex. As such, they are subject to a high level of risk due to leverage. Please keep in mind that CFD trading is banned in the US.
Information published on the NewTrading.io website is for educational purposes only and should not be construed as offering investment advice or as an enticement to trade financial instruments.
What is position trading?
Position trading is long-term trading, typically lasting from a few weeks to a few months or even a few years.
The position trader seeks to capitalize on significant upward and downward price trends in the market. Therefore, they ignore shorter-term counter-trend movements such as rebounds or Traditionally, the term market correction specifically refers to a decline of 10% or more in the price of an asset or index from its recent peak, mainly to adjust for overvaluation.
The position trader’s goal is to capture price movement in the market and collect the difference between their buy price and sell price. When their prediction proves accurate, they earn money. When their bet fails, they lose. It is a pure trend-following strategy.
Like other active traders, position traders usually place stop-loss orders to cut losses in the event of adverse market movement and take-profit orders to secure gains once the target price is reached.
In a range-bound market, where prices fluctuate within a fixed scope, a position trade might remain open for years as it awaits significant price shifts.
Advantages and disadvantages of position trading
Although several famous traders have successfully used position trading, it is perhaps the strategy least used by retail traders (most likely because, at first glance, it doesn’t seem as thrilling as scalping or day trading).
Position trading requires great patience and discipline because large trend movements are much rarer than the short-term opportunities created by market noise.
As a position trader, you spend most of your time conducting in-depth market analysis, searching for signs of the next trend rather than placing stock market orders.
Profit potential and risk are pretty high since take-profit and stop-loss orders may not be reached until far into the future. Position sizes are relatively large to compensate for the limited market opportunities. The history of position trading is chock-full of booming successes and resounding failures!
Finally, position trading has some purely financial drawbacks, starting with the fact that you’re tying up a significant amount of capital for a long time.
Advantages
- Ability to capture large-scale movements with significant gains
- Lower brokerage fees (fewer trades than with scalping or day trading)
- Minimal number of hours at your desk and in front of your monitor
Disadvantages
- Risk of substantial losses due to a wide stop-loss setting
- Few day-to-day opportunities
- Presence of specific risks and costs (overnight gaps, rollover, etc.)
- Capital locked in for a long time
Position trading strategies
Position traders blend technical and fundamental analysis to bet on a new trend, even before it appears. While it may prove risky, anticipating a new trend positions them (they hope) to capture the largest possible price movement.
Position traders usually develop their own trading plans to try to beat the market. As a result, there can be tremendous variation in conditions for entering and maintaining a position and in the risk-reward ratio used by position traders.
Nonetheless, there are some great examples of position trading.
Examples of position trading
1. The LTCM bankruptcy
Long-Term Capital Management (LTCM) was founded by John Meriwether and composed of several Nobel Prize winners, including Myron Scholes and Robert Merton. LTCM implemented a position trading strategy to profit from arbitrage opportunities in the interest rate markets.
With positions totaling $1.2 trillion, LTCM bet that bond rates would converge following the Asian crisis of 1997. However, a problem arose. The crisis spread to the Russian Federation and caused a new bond shock in 1998.
LTCM’s bet failed with an abyssal loss of several hundred billion dollars.
2. Georges Soros’ stroke of genius
George Soros, founder of the Quantum Fund and nicknamed “the man who blew up the Bank of England,” made an astronomical profit estimated at more than 1 billion dollars in 1992.
At the time, Britain was still part of the European Exchange Rate Mechanism (ERM), designed to reduce exchange rate volatility between European currencies before introducing the euro.
In an attempt to favorably fix the pound sterling’s exchange rate against other ERM currencies, the Bank of England intervened in the financial markets, buying and selling its own currency.
Georges Soros was convinced that the pound sterling was overvalued and that the Bank of England couldn’t sustain its currency for long in the face of market forces, so he opened an enormous selling position.
On September 16, 1992, the Bank of England finally succumbed. Britain withdrew from the ERM, and the pound sterling was devalued. Georges Soros had achieved the most beautiful move in the history of position trading!
Position trading for beginners
Position trading is an excellent choice for novice traders who are looking for a less time-consuming and less stressful trading type than day trading. It also allows U.S. located traders to sidestep the Pattern Day Trader (PDT) rule, making it easier to manage the capital needed to start trading without the restrictions faced by frequent traders
Position trading is not concerned with short-term volatility, which frees the trader from their desk and monitors and allows them to trade as a hobby alongside their day job.
In addition, position trading leaves time to learn trading at your own pace. Rather than spending most of their daily trading sessions trading compulsively, a novice can work on refining their strategy and analysis methods.
Conclusion
There are two sides to the position trading story. Elite position traders can undoubtedly hope to pull off the trade of the century, but aspiring position traders have to be careful not to get annihilated by the market.
Like any trading strategy, position trading is a “risky business.” Before starting real trading, it is recommended that you practice on one of the best free trading simulators.
FAQ
What’s the difference between position trading and investing?
Position trading differs from long-term investing in that it involves holding assets for weeks to months, and includes active management like short selling to capitalize on both upward and downward market trends. This approach contrasts with the years-long hold period and more passive asset selection typical of investing.
What’s the difference between position trading and swing trading?
The main difference between position trading and swing trading lies in the time horizon of the trades. The swing trader takes medium-term positions (from a few days to a few weeks), whereas the position trader takes long-term positions (from a few weeks to a few months or even a few years).
Which market is best suited for position trading?
Position trading is suitable for all asset classes but is most effective in markets that show stable, long-term trends.
Which type of accounts do position traders prefer?
While trading in your retirement account may be possible, you should thoroughly investigate certain advantages and disadvantages. A standard brokerage account with one of the best trading brokers will perfectly meet a position trader’s expectations.
What financial products do position traders prefer?
Live position trading on stocks (securities) or products such as index futures helps reduce the high overnight fees charged on products such as CFDs. Regardless of your choice, make sure you always understand how the selected products work and that you have sufficient financial resources to cover the associated risk of capital loss.
How much capital is required to start position trading?
Some online brokers let you start position trading with only a few dozen euros, mainly because they offer investing through fractional shares. Make sure you establish your initial capital investment per your trading budget.
Maxime holds two master’s degrees from the SKEMA Business School and FFBC: a Master of Management and a Master of International Financial Analysis. As founder and editor-in-chief of NewTrading.fr, he writes daily about financial trading.
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