There are many types of traders. Some traders place dozens or even hundreds of trades during a session, while others open well calculated orders and hold their positions active for months on end. This is called position trading strategy in Forex and is highly popular among traders. FX position trading strategy is mainly focused on economic and political information. Some position traders also rely on technical, such as significant levels, volume indicators, etc.
Unlike scalping and day trading, position trading is also popular among institutions, who usually manage large sums of money and are looking for investing opportunities. Let’s dive deep to find more about position trading.
Core features of forex position trading strategy
- Position traders hold their positions open for weeks or months at a time
- Major economic developments and news serve as catalysts for position traders
- Position trading relies more on fundamental analysis than on technical indicators
- Forex position trading strategy brings higher success rate as orders are more calculated, however, traders get fewer trading opportunities
- Short-term fluctuations can be a great challenge for the more impatient trader
- Rollover fees are important considerations for position traders
- Position trading requires less screen time than intraday, high frequency trading. Most time is spent on market analysis
- Position trading strategy for trading Forex is great for individuals who like to think and plan more and do not have fast fingers
How does a position trading strategy work in Forex?
Before diving deeper into the variables that affect position traders and the unique perks and challenges associated with such strategies, it is essential to understand the key principle behind position trading, and that’s patience.
Position trading strategy in FX trading can be boring for individuals that like to be in a position all the time. There might be days when you don’t get any trading opportunities. The best thing you can do on such days is to sit on your hands. Traders that can not do that, end up placing unnecessary orders, they overtrade and lose money.
Position trading definition and meaning
Before analyzing the viability of position trading strategies, we must first define the strategy and what it means for forex traders.
Position trading is a trading strategy that involves opening a low amount of trades and holding these positions active for longer periods of time. While long-term FX trading may involve keeping positions for months or years, position trading can be done on a medium timeframe and trades can be closed within weeks or a few months from opening.
An example of a position trade would be to buy a currency at a low point with an expectation that the official meeting scheduled within a month would turn things around, so you can sell your position for a 5-10% profit. Such margins in forex are rare and typically only available to traders who use wider timeframes.
Catalysts to look out for
A number of important political and economic events can greatly affect the forex market. Some events to look out for are:
- GDP growth and contraction figures released quarterly
- Interest rates and their changes
- Meetings of national bank officials
- Unemployment rate and data breakdown
- International trade and trade balance
- CPI index and inflation rate
- Major elections and changes of government officials
- Conflict and natural disasters
- News specific to the FX market
- Regulations and government policy
Keeping track of all of these events can seem like a challenge, but most FX brokers offer economic calendars that map out all the essential, relevant events that can have an effect on the market. Using these and other tools provided by your broker is critical for reducing the workload for each trade.
When using a position trading strategy in Forex, it’s critical to note that you will most likely pay swaps. Swaps are interest charged for keeping positions active overnight, these fees are also called rollover fees. They are automatically deducted from your trading balance. A critical factor to consider when holding positions active for long periods of time is the cost.
Overnight fees can also be positive, based on the interest rate of the currency you are holding. Therefore, some currency pairs may benefit from position trading and be a cost-effective way of trading Forex.
While position trading strategy for FX traders relies heavily on fundamental analysis, this does not mean that the strategy neglects technical analysis altogether. Some of the most useful indicators for position trading are:
- Moving averages – Moving averages smooth out price data by analyzing price points over a set period of time. Simple moving averages follow the price loosely, while exponential moving averages assign a favorable weighting to the most recent data, which makes it follow the price curve more closely
- The RSI – The relative strength index measures the strength of market trends, which is useful when analyzing the severity and possible duration of short-term fluctuations. The RSI can also be used to find favorable entry and exit points on the chart
- Support and support and resistance are important to know where the boundaries of trends may be and where possible breakouts could happen
- Fibonacci retracement levels – Using Fibonacci is useful in timing entry and exit points. Fibonacci allows you to monitor the levels periodically to see if any manual corrections are necessary
The risk/reward ratio is an important metric to consider, determining the degree of risk to be undertaken for an amount of profit. The standard advisable risk/reward ratio for forex trading is 1:2, which means traders risk the loss of one pip for the chance of profiting two pips. However, risk to reward ratio can be 1:1, if your strategy has higher win rate. In general, position trades have good win rates as trades are better calculated.
To better analyze the risk and reward associated with your strategy, consider these steps:
- Research the possible risks – Analyze the pair of your choice and the possible developments that could occur over your chosen timeframe (consider the catalyst events that are scheduled)
- Estimate the possible losses and profit based on your position size
- Weight each possible outcome with the probability of it occurring
- Compare the weighted possible profits and losses to decide whether such a risk/reward ratio is acceptable to your trading objectives
You can start position trading with limited capital and use leverage to increase your purchasing power. In simple words, leverage helps traders increase their purchasing power using borrowed funds from their broker. However, it is unwise to use high leverage as each trade becomes too significant and one loss ca be highly costly. Professional traders never risk more than 1-5% of their trading capital per trade. Forex position trading strategy requires higher capital than intraday strategies. The reason is simple, when making a lot of trades, your positions can have smaller size, but when you make one or two trades per 3 months, your positions need to be greater.
Pros and cons of FX position trading strategy
Before looking at a practical example of position trading, let’s look at some core advantages and disadvantages of the strategy.
- Considerably less stressful than day trading
- Does not rely heavily on technical indicators, which are prone to generating false signals from time to time
- Is a long term strategy that can be highly profitable when done right
- Leaves the trader with more free time to engage in other activities
- Long waiting times can test the patience of most traders
- Many factors can render the position unprofitable, leading to wasted time and capital
- Geared more toward standard lots with large capital contribution
- News and fundamental changes can quickly reverse market trends
- Rollover fees can start chipping away at capital when the trade is left open for extended periods
- A lot of capital is needed to maintain multiple open positions for longer periods of time
Position trading strategy example
An example of position trading would be buying the GBP/USD pair when it fell to historic lows below 1.07 and selling the position at current price. The rationale behind such a trade could be the fears surrounding a UK recession and record high energy prices, which plunged the pound against the dollar. However, such market sentiment is often followed by a move in the opposite direction, which is evident on the chart. Trades like these require little to no technical analysis and are firmly rooted in the analysis of economic news and being attuned to the sentiment of long-term investors and traders. Timing is the key when it comes to position trading. It’s important to plan entries and exists well.
FAQs on the position trading strategy in FX
What is risk-reward in position trading strategy?
Risk to reward ratio depends on a trading setup and a trader’s appetite for risks. In general, trades made by position traders are less risky than high frequency trades, as each trade is more calculated and better planned. The obvious downside is that traders get less trading opportunities when they become more selective.
Is position trading strategy right for you?
Position traders take more time to analyze markets and make trading decisions. If you are a trader that doesn’t have quick fingers, you should stay away from high frequency and news trading. For traders that are good at planning and fundamental analysis, position trading is a great option.
Can I implement position trading strategy with $100?
Yes, however, do not expat high returns in terms of income. To make money, you need a good investment. You can use leverage to increase your buying power, but leverage increases your risks too, and it’s not recommended to take oversized risks. $100 trading accounts are generally used to test trading strategies live.