Position Trading: Techniques, Pros, and Cons
November 23, 2021
Position trading is a very particular trading style, considered "extreme" by many traders but practiced nonetheless. After all, it refers to the long term and goes against some of the prejudices and misunderstandings associated with trading activity.
It's worth exploring position trading, providing a clear and exhaustive definition, presenting its mechanisms, and outlining its advantages and disadvantages. We will do this in the course of this article, where, among other things, we will discuss the markets most compatible with position trading and some of the practices associated with this style.
A definition of position trading
What is position trading? Simply put, trading is "positional" when positions are held for a long time, for months or even years. The purpose of this style is to minimize errors and take advantage of large price movements or structural trends.
Both the opening and closing are decisive. The opening occurs when a very solid trend has formed, which "threatens" to continue over time, albeit interspersed with other trends of less breadth (on which traders of other styles operate). The closing occurs when the trend is about to end or, more often, when the position has accumulated sufficient profit to justify all the time spent.
Those who practice position trading always adopt a following trend strategy. After all, it is not technically possible to take advantage of small price movements, anticipate the market with timing and therefore, in a sense, go against it.
Position trading is certainly a more sedate style, which does not generate much stress. Moves are pondered at length and finally executed without major upheavals.
Position trading thrives mainly on fundamental analysis and analysis of fundamentals. Since it exploits long-term movements, which are such only because they have structural value, the trader must look at the characteristics of the asset and how these interact with events of dramatic importance. Just to give an example: a radical change in monetary policy, in the context of Forex trading.
This requires a thorough knowledge of the asset in any case, even before the contingencies. It is no coincidence that position traders are very often experts.
As for the most compatible markets, the list is long. In general, all those markets in which there is a strong link between assets and market movers are fine, regardless of volatility. So, bonds as well as stocks, Forex as well as commodities can be fine. A different discourse, for example, for Cryptocurrencies, which are certainly susceptible to what happens outside (perhaps too much) but do not boast stable and predictable market movers.
Pros and cons of position trading
Is position trading the best possible choice? Not necessarily. Perfection is not a value that can be applied to a trading style, regardless of the dynamics that run through it. Like all others, it has its pros and cons.
The main advantage of position trading is the low level of stress. After all, if the position is opened and closed over months or years, the trader does not suffer the psychological pressure of having to decide often and well.
Another advantage consists of low management costs. Some Brokers, especially non-market makers, impose a commission every time an order is issued. Well, in this case, since the orders issued are objectively few (indeed very few) the management costs are not heavy. The same goes for spreads, since these, although variable, are made when buying or selling.
Finally, position trading, if done well, can generate very high profits, and in a "single shot". A bit like when you liquidate a long-term investment product.
The disadvantages are not lacking. For example, the low yield. Okay, the gains are substantial for each position, but considering that the positions are few, you risk taking home figures that are all in all meager.
Finally, the need to thoroughly know the asset and the market movers that concern it. Often it takes years to mature a knowledge such as to transform position trading into a truly profitable opportunity.
