How to benefit from position trading strategy

Trading
January 10, 2020

In general, there are three trading approaches used by traders in the context of time frames. First, there is the day-trading approach in which traders open and close the position within the same day. This group of traders usually doesn’t allow open trades overnight i.e. you start and finish the day with a clean slate.

The second category of traders is arguably the most populated one. Swing traders tend to hold a position in the short term, from as short as a few days to as long as a few weeks. The time horizon for them is less important as it is the market swing they are trying to catch. 

Finally, the position traders are those who look at markets from a bird's perspective. Their aim is to analyse the markets and open/close a few positions throughout the year.

What is position trading?

Position traders focus on the big picture with an aim of capturing big moves - and big moves need time to develop. Hence, these types of traders are mostly interested in longer term price moves in the market and the overall trends and cycles of the market. 

Unlike the day trading, or swing trading, position trading is mostly based on the fundamental forces that move the markets. Hence, junior traders without in-depth knowledge of fundamental factors are unlikely to take this approach to trading the markets. 

For this reason, position traders are usually banks, funds, or other types of institutional investors as they have the resources to identify market-moving trends and get to the bottom of them as one has to go through market data, general market trends, and historical patterns, which takes a lot of time and resources.

As every other trading approach, position trading has pros and cons. Positive sides of this approach are: 

  • Pay less attention to commissions and fees as your focus is on the big moves
  • Take some time away from the screen as you are not interested in the hourly price action
  • Catch big moves as you won’t get out of the position as soon as it becomes profitable

Of course, position trading is associated with some risks:

  • It requires tons of patience
  • Trend reversal may prove to be costly as stop loss is usually set far away from the entry
  • Funds are usually engaged in long-term trades, which means your capital is tied up for long periods of time

Technical aspect of position trading

While the fundamental aspect of the trading process is the moving force behind position trades, the technical analysis has its place in the system as well, as it is used to identify trends in price action that may lead towards earning profits. 

Position traders usually look at monthly and yearly charts to analyse the price action, in addition to the analysis of macro-economic data and correlated markets. 

As far as technical indicators are concerned, position traders tend to stick to the basics. Moving averages are a popular tool, but again, when applied on higher time frames. In general, longer term price action usually reacts to 50, 100 and 200 period moving averages.

Trend lines are another popular technical indicator used by position traders. More conventional markets, such as forex or the stock market, offer trend lines that connect data points in the previous 20, 30 years. 

Position trading: Breakout strategy 

Breakout strategy is one of the more popular trading strategies. It is applied in the early stages of a trend when the asset breaks above/below the resistance/support levels. The break signals there may be large-scale price movements coming in the direction of the initial break. 

Let’s take a simple example to demonstrate how this strategy works. In the chart below, we see BTC/USD on a weekly time frame. On the left side of the chart, the price action moves in an apparent downtrend as it had previously created a series of lower highs. 


BTC/USD weekly chart (TradingView)
BTC/USD weekly chart (TradingView)

The trend line connects four data points before the breakout occurs. The more touches and the older the trend line is, the more relevant its presence is. At one point, the series of lower highs is broken as the market starts moving higher. At this point, we see an end to the bearish trend and a potential beginning of the new trend. 

Ideally, we should wait before entering a trade to see whether the market will follow up and continue in the direction of the break. In this case, Bitcoin ultimately gained more than 260% in approximately 3 months. 

As we mentioned before, position trading is mostly based on fundamental factors. So, if we decided to buy Bitcoin due to fundamental reasons, a breakout would act as a trigger for us to enter the market. 

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