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Forex Trading – Position Trading

Position traders have the longest trading timeframes among the different categories of traders and, unlike scalpers, can hold positions for periods ranging from several weeks to several months. They have an excellent understanding of the fundamentals of the Forex markets and concentrate on making profits in the long term. Depending on the currency, the look at profit potential ranging from hundreds of pips to thousands of pips and their timeframes involve the use of daily, weekly and even monthly charts. They are not concerned with short term or sometimes even medium term market movements and often have access to large amounts of trading capital to take care of floating losses in case the market goes against them for prolonged periods of time. They will keep track of technicals but often use longer term fundamental models to take care of government policies and interest rate developments. They generally trade currencies that are considered highly liquid.

 

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Position trading-Needs deep market knowledge

The advantages of position trading are:

Lower transaction costs: scalpers incur the highest transaction costs because of the trading frequency. Position traders are at the opposite end of the spectrum because they  execute very few trades and concentrate on the management of those trades. They are able to achieve this by using dynamic stop losses to reflect the movements in price. For example, they will continuously shift stop losses upwards for long positions and downwards for short positions. This also enables them to realize part of their profits which have accrued.

Interest earnings: every trade in the Forex market involves borrowing one currency in order to purchase another and interest ( also known as swap) is paid on the currency that is borrowed and received on the currency being purchased. So if the interest rate on the borrowed currency is lower than the interest rate on the other currency, the net difference will be positive in your favor. These profits can be quite substantial because of the length of time for which the position as held.

Control of emotions: position traders have to learn to control greed and they already have a sizable profit on their positions because of the prospects of winning even more by continuing to hold the position. Similarly, they have to learn to control fear when they see losses on the current positions in the expectation that the trade will be profitable in the long run. Patience is therefore an important attribute for a position trader.

 

Different perceptions of position trading

 

The first differing perception is about the length of time for which a position is held. There is one school of thought that says that even a position held for more than one day amounts to position trading. Others say that if a position is established based on some fundamentals and you hold that position as long as these fundamentals remain unchanged, this is position trading. For example, you may believe that the central bank of a particular country is likely to continue raising interest rates in order to combat rising inflation. If you buy that particular currency and continue to hold as long as inflation is rising, it could be termed a long-term position because fundamentals do not change quickly. It is true that position traders must deal with prolonged periods of time when their positions are losing but equally, they must move quickly to square off their positions if the underlying fundamentals change.

 

Position Trading compared to Day Trading

 

The basic difference arises from the different time frame because position trading concentrates on the long-term direction and copied concerns itself with the direction and movement in a single trading day. The long-term outlook of position trading means that the data and the news used in analysis should be based on fundamental factors such as economic outlook and inflation.  Day traders, in contrast, can establish positions on the basis of a single piece of news which has a short term impact. Another major difference is in the sizes of the positions and the leverage that is deployed. Positions in position trading have to necessarily be smaller than positions in day trading because the long-term position has to withstand the impact of price fluctuations over a long period of time. For the same reasons, position trading uses a lower level of leverage which has the impact of multiplying floating losses on open positions. For example, a fluctuations of 3% can effectively wipe out any position with the leverage of more than 30 times. You also require to maintain higher margins in positions that involve position trading because you are required to hold them for long periods of time.

 

Making a start on position trading

 

Before you start on position trading, there are a few basic factors that you need to understand. The first and most difficult thing that you need to establish is the trend in the market for that currency. Reading news and analysis over a period of time can help you to gain a better feel for the likely trends. It is also important to remember that fundamental analysis alone is not the only weapon and that you can be used technical analysis techniques to evaluate the fundamentals. You will also sometimes find that there are no discernible trends for periods of time which makes it difficult to identify a long-term direction. In order to manage risk, you will also need to evaluate volatility because highly volatile conditions for a particular currency could magnify the impact of the floating loss on long-term positions. Finally, because of the smaller size lots involved in position trading, you will need to find a broker who can support this trading style.