What Is Position Trading?
Position trading is the methodology or strategy whereby traders seek to capture trends in the market. The idea is to catch the trend’s peak without getting stopped out on the retracements. Like any trading strategy, position trading has its pros and cons, which will break down below.
- It requires only 30 minutes per day
- You can squeeze it into your full-time working schedule without too much effort
- It’s less demanding than swing or day trading
- You’ll be watching winning trades turn into losing ones often
- Your winning rate is low (anywhere between 30% and 40%)
Could you live with this? Not sure? Read on to find out.
The Golden Rules of Position Trading
The best time to enter a trade is arguably when the trend begins to shape. But how do you know? The best signals of a new trend are:
- Support & Resistance
- Breakout of a long-term range
- The first pullback
What does this mean? Let’s dig deeper into the matter.
Support & Resistance
Identifying these levels with precision enables you to “buy low and sell high” to get the most profit. For those of you who may not know (or would need a recap), support is an area on the chart where the asset may potentially face buying pressure. It is also known as “the price level below which the price cannot decline” quickly.
In contrast, resistance is the area on the chart where the asset may face selling pressure. This is why it is often referred to as “the price level above which the price cannot rise” too fast, too soon. Let’s take a look at an example.
An uptrend is confirmed only after the price surpasses the top levels of a range. Therefore, if you wish to enter before the price breaks out, it’s best you do so when the market is still ranging.
Where should you go long when the market is range-bound? Always at support.
Breakouts are the salt and pepper of trading as they mark the shifts in market direction. In general, the longer a market is range-bound, the less likely it is to change or become trendless.
Typically, when the market ranges, traders will go long when the price is at support and go short when it’s at resistance, placing their Stop Loss/Take Profit levels below support and above resistance.
Over time, the stop-loss will increase and decrease as more traders chase down the range’s highs and lows (pun intended). Nevertheless, the market will eventually break out.
If it breaks out higher, momentum traders and position traders will buy the breakout. That is, they will choose to go long the moment the price slashes through the resistance level.
In contrast, short traders will cut losses by selling the asset when the price reaches its resistance level. In doing so, they supercharge further buying pressure. As a result, a decisive breakout occurs, shaping a new trend.
The First Pullback Rules
Pullbacks can make or break your experience, especially in position trading. Typically, pullbacks are temporary price moves against the trend, offering traders the opportunity to enter. Generally, the best pullback is said to occur immediately after a breakout.
As explained above, when the market is range-bound, it just has to break out. When it does, traders who have missed the move are eager to enter on the first pullback. Essentially, pullbacks are great opportunities to go in because of their superficial (if any) retracements, as hardly anyone wants to trade against a strong momentum. In this case, what you can do, as a position trader, is buy the break of a swing high and ride the trend. Here is a chart example:
Now that you know exactly when to make your profitable entry, it’s time to get down to more “expert” things – timing your entries for position trading.
Timing Your Entries
There are two techniques you can use in position trading, namely:
- The false breakout
- Volatility contraction
Using the False Breakout in Your Favour
This technique is suitable for trading support and resistance. It is said to take advantage of “trapped” breakout traders who tend to buy on the break of swing highs.
What happens if the market breaks out higher and then swiftly reverses lower? Breakout traders remain “trapped” in their long positions, which then turn red. If the price continues to decline, their Stop Loss will be triggered and thus fueling the downward momentum. This is how a false breakout can provide an excellent opportunity to enter a trade. For more clarity, let’s look at a false breakout example, where the price breakout out higher and reverses lower.
Of course, the false breakout is not easy to read as there are countless variations. Sometimes, it can take the shape of reversal candlestick patterns, such as the Hammer or Shooting Star.
This is a technique traders use when volatility is low. Typically, a volatility contraction takes the shape of tight consolidation, with short, ranged candles, as shown in the chart below.
This technique allows you to enter a long trade when the market breaks out of the volatility contraction.
Setting up Your Stop Loss
Setting up your Stop Loss (SL) is one of the biggest challenges of position trading. Often, traders tend to set it up too close to the support level and get stopped out before the trend even starts to move in their favour.
To prevent being stopped out prematurely, it’s best to allow about 100 pips between support and the level of your SL. This will keep you safe from being “support-hunted” and will help you cut out all the “noise”.
To do that with greater precision, you can use the Average True Range (ATR) indicator that will help you set your SL 1ATR below support (or 100 pips), as shown below.
Combining technical and fundamental analysis
Position traders use both technical and fundamental analysis principles to help them in the decision-making process. Macroeconomic factors (e.g., GDP releases, monetary policy decisions, retail sales data, consumer confidence, etc.), general market trends, and historical price patterns are decisive in determining the optimal entry and exit points.
Position trading is a strategy that requires both knowledge and substantial capital to start with. Most importantly, before you even think about position trading, you need to thoroughly analyse your goals and investment potential, as it can be costly in the long run. To help you decide, we’ve prepared a list of aspects you need to consider before going in head-first:
- Are you saving for a rainy day?
- Are you planning to become a professional trader?
- Do you simply enjoy betting on the financial markets?
- Are you looking to build a diversified portfolio?
- Do you want to increase your net worth?
- How much time can you devote to trading every day/every week and tracking your portfolio’s performance?
Position Trading vs Swing Trading vs Day Trading
|Criteria||Position Trading||Swing Trading||Day Trading|
|Time horizons||Long term||Medium-to-longer term||One day|
|Time in the market||Less active time required||Less active time required||More active time required|
|Equipment required||A brokerage account||A brokerage account||A brokerage account + cutting-edge trading software|
Generally, position trading is suitable for bullish markets, with a strong trend. In bear or trendless market conditions, it’s best to avoid this strategy as it can be misleading and lead to substantial capital loss. In these cases, you may wish to consider day trading instead for optimal results.