Position trading involves holding positions for weeks, months or even years with the expectation they will become profitable in the long term.
Investing is the most recognised and traditional form of position trading, with a great many people holding long-term investments in share portfolios, funds or pension plans. However, ‘investing’ exclusively refers to going long, while position trading can include going short as well.
Before entering a trade, a position trader will often spend a considerable amount of time studying the fundamentals of the asset they’re going to be trading.
For example, when buying shares, you’d usually look at the company’s financial reports, and in particular the financial statements, to see if it’s making profit or has an edge over its competition. Similarly, if you were position trading on forex, you’d probably examine the economic health and monetary policies of the relevant countries before placing a long-term currency trade.
Because of the long-term nature of these transactions, position traders tend to risk a lot more per trade than other types of trader – though with the expectation of making greater profits. Which means to be successful you need to have patience, and not get spooked by short-term market moves.
If you decide to follow a position-trading approach, there are a few things you need to be mentally prepared for.
When holding a trade for a long time, it’s almost inevitable that the market will move in an unfavourable direction at some point. In these circumstances you need to have the resolve and conviction to follow the rules set out in your trading plan, waiting for the market to turn back in your favour if required.
But imagine if you were then to read comments in the press suggesting the market could move even further against you? Would you be able to hold your nerve?
What’s more, if trading using leverage, you need to make sure you have enough starting capital to weather any large unfavourable price swings. As trades are made over such a long timeframe, the market could easily trend against you for several days or weeks, even if it does end up reversing eventually. These moves could force you to close your position early if you don’t have enough capital in reserve.
