Position trading

Quick definition

Position trading is a trading strategy common with trend followers whereby traders open several positions based on the prevailing trend.

Key details

• Position traders determine a trend and open positions based on the prevailing trend. 
• Position traders are less concerned by short-term market fluctuations.
• Position traders look for higher highs and lower lows to determine the prevailing trend. 

What is position trading?

Position trading is a trading strategy common with trend followers. While relying on longer period charts, position traders determine a trend and open positions based on the prevailing trend.

Unlike day traders and scalpers, position traders are less concerned by short-term market fluctuations, which is one of the reasons why they hold trades for weeks, months, or even years.

Position traders look for higher highs and lower lows to determine the prevailing trend. They take advantage of the wave and open either long or short positions, depending on the prevailing trend. The traders ride along with the trend until it changes direction. At that point they’ll exit, taking with them the profits accrued in the process.

The fact that position traders hold positions sometimes for years is one of the reasons why position trading is often referred to as investing. Position traders maintain long-term investments in share portfolios as well as in funds and pension plans.

For these reasons, traders who deploy this form of trading rely on both fundamental and technical analysis, to evaluate market trends and pick the right securities to invest in.

Popular position trading strategies

There are several position trading strategies traders use to enter the market and below is a brief explanation of a few.

Support and Resistance Strategy

By carrying out in-depth technical analysis, position traders ascertain critical resistance and support levels based on past price action. Resistance and support levels allow traders to know when the price of an asset is likely to move in an uptrend or downtrend.

A support level, in most cases, is a level at which the price of an underlying asset bounces off after coming under pressure. Buyers are known to place buy orders at this level. Likewise, the resistance level is a point at which the price struggles to break through when trending up. Traders are known to place sell orders at this level.

Based on the resistance and support level assessment, position traders can make an informed decision on whether to open or close positions on underlying assets.

Breakout Strategy

A breakout trading strategy is an approach position traders use to take advantage of price strength. Once in a while, price breaks through support and resistance levels.

Position traders anticipating breakouts after analysis would most of the time open long positions at the resistance level, awaiting the price to break above as it moves to record a new high.

Likewise, position traders open sell orders whenever price breaks through a support level, signalling the emergence of a downtrend. To be successful with this strategy, one needs to be accurate in determining support and resistance levels in the market.

Range Strategy

A range trading strategy allows position traders to open and close trades in markets that are moving sideways. Such markets are known to shift up and down, bouncing off support and resistance levels. A range trading strategy is especially beneficial with assets in overbought and oversold conditions. The idea in this case is to sell overbought securities and buy oversold assets.

Pullback and Retracement Position Strategy

A pullback position trading strategy allows traders to take advantage of small price reversals from a prevailing trend. Pullbacks occur whenever price reverses from an underlying trend and starts to move in the opposite direction. With strong prevailing trends, reversals usually last for a short period before continuing.