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. It’s a type of medium- to long-term trading approach designed to ride upward and downward market trends over time.
The typical position trader seeks the best opportunities and doesn’t shy away from ambitious goals. If their analysis is correct, they aim to generate substantial profits.
Position trading closely resembles the buy-and-hold investing strategy with notable differences. For one, while buy-and-hold investors typically don’t bet against the market or a specific investment, position traders can go long and short to ride both up and downtrends.
Also, buy-and-hold investors don’t usually try to exit positions at the end of a trend or time the market, which is a key component of position trading.
Key Takeaways
Position trading is a medium- to 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 can take many bullish and bearish positions 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.
Position traders might focus on shares of a specific company or take a more macro view with positions in futures (metals, oil, interest rates, bonds, or currencies), exchange-traded funds (ETFs), or currencies.
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 informational 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 medium- to 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 tend to ignore shorter-term counter-trend movements such as rebounds or corrections.
The position trader’s goal is to capture price movement in the market and collect the difference between their buy price and sell price. They might buy first and then sell or try to short the market by selling first and then buying later to close the position. When their predictions are accurate, they earn money. When their trades fail, they lose.
Like other active traders, many position traders usually place stop-loss orders to cut losses in the event of adverse market movement and use take-profit orders to secure gains once the target price is reached.
When the market is range-bound, a position trade can remain open for several years while the trader waits for the trend to unfold.
Advantages and disadvantages of position trading
Although several famous traders have successfully used position trading, it’s 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 a lot of buy and sell orders.
Profit potential and risk are pretty high since take-profit and stop-loss orders may not be reached until far into the future, and position sizes are often 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 sometimes 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,
- Capital locked in for a long time
Position trading strategies
Position traders often 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), founded by John Meriwether, included some of the most respected financial minds, like Nobel Prize winners Myron Scholes and Robert Merton.
LTCM’s strategy relied on complex relative value trades—exploiting small price differences between related securities. But unlike typical position traders, LTCM added extreme leverage.
After the Asian financial crisis of 1997, LTCM took massive positions, betting on the convergence of various bond spreads. They believed these spreads would narrow over time, holding their positions for over a year.
But then came the Russian financial crisis in August 1998. Instead of narrowing, spreads widened dramatically. LTCM’s leveraged positions spiraled into a $4.6 billion loss, threatening the entire financial system.
2. Georges Soros’ stroke of genius
George Soros, founder of the Quantum Fund and known as “the man who broke the Bank of England,” made over $1 billion in profits by betting against the British pound in 1992.
At the time, Britain was part of the European Exchange Rate Mechanism (ERM), a system meant to keep the pound stable against other European currencies. But Soros saw a flaw: the pound was overvalued, and the Bank of England was struggling to maintain its value.
Months before Black Wednesday (September 16, 1992), Soros began quietly building a massive short position, convinced that the pound couldn’t hold its ground. His strategy wasn’t just a quick trade—it was a classic position trade based on a clear long-term view.
And he was right.
When Britain pulled out of the ERM, the pound plummeted, handing Soros one of the biggest paydays in trading history. Soros’s trade was calculated as a position based on months of careful analysis and a deep understanding of macroeconomic trends.
Position trading for beginners
Position trading can be an excellent choice for novice traders who are looking for a less time-consuming and less stressful trading type than day trading.
Position trading isn’t concerned with short-term volatility, which frees the trader from their desk and monitors, allowing them to trade 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 methods of analysis.
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 traders may concentrate on the shares of a particular company or adopt a broader perspective by taking positions in futures (metals, energy, stock indexes, bonds, or interest rates), exchange-traded funds (ETFs), or currencies.
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.
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.
