This strategy aims at profiting from price movement or a change in the duration of an underlying asset. Position trading is a form of day trading in which you maintain positions for long durations, often months or even years, instead of shorter-term trades that last hours or days.
The significant distinction between position trading and other forms of day trading is that it features a lot more entry and exit points, making it less hazardous and considerably slower.
Why position trading?
If you are new to trading, position trading is the right choice. It is less risky than regular day trading because it does not require watching market activity throughout the day. There are no hard and fast rules about starting this kind of trading. However, always make sure that your initial trades are small to keep down losses if something goes wrong.
Once you have gained some experience, it would be wise to use this strategy alongside day trading or other strategies – depending on whether your outlook favours long or short-term investments.
Which assets are suitable?
You can use position trading in any market, but stocks, currencies, commodities, and derivatives like options are the most popular choices.
How does it work?
Position trading is a strategy in which one buys or sells currently open contracts. For example, suppose you think the price of EUR/USD will go up in the future, but you’re unsure when it’ll happen. You’re buying at the current spot price if you now buy an open position contract.
If the Euro goes up against the US Dollar (which means USD/EUR goes down) soon after, you can sell your contract for more than what it’s worth right now.
However, if the Euro doesn’t go up within three months of buying your contract at $1.2000, then your profit will be -$200 (because each point is $10). Time decay is working against you with this position trade.
On the other hand, if you think the Euro will go down against the US Dollar, you can sell 3-month contracts currently open and wait for them to expire worthless in 3 months. If your timing was correct, you made a profit of $200 per contract sold at maximum.
It’s also a good strategy for beginners in options trading because there’s no need to predict how much their assets will move in percentage points or anything specific like that. You don’t even have to guess when exactly their value will change. All you need to do is identify when one currency goes up/down against another.
Entry\exit points
The distinction between position trading and other day-trading styles is that while scalping requires numerous little entry and exit points, positioning necessitates many entry and exit points, making it less hazardous yet considerably slower.
The two most significant advantages of this technique are its low danger and the fact that you don’t have to be glued to the computer all day, unlike short-term trades that last hours or days. Although this approach is more challenging to implement, it can provide significantly greater opportunities than intraday and swing trading on price, with the same extremes for entry or exit.
When choosing to take a position, traders should consider their investment goals while assessing the effects of good and bad news on an asset’s price. They should also try to diversify their risk across several assets. They shouldn’t be overly reliant on any one market. Investing in junk bonds, which are high-yield corporate bonds with a credit rating of BB or lower, is one way to diversify your portfolio and reduce the effect of a specific market’s movements on the value of your assets.
What about spread betting?
Position trading can be done through spread betting, but only with CFDs that have been opened beforehand. In other words, you cannot buy or sell contracts right from the market at current prices. Instead, make sure you open positions before making predictions about whether a particular currency pair will increase or decrease in value.
Conclusion
Position trading might seem very simple on paper, but it is pretty tricky to master in practice since timing is everything here. Professional traders recommend practising on demo accounts first before investing real money.
Positions are better than day trading in the Euro/USD market because there’s less chance of making or losing money in a single day. You can also use risk management strategies like the pros at Saxo to reduce your risks and increase your gains.