We continue our series of educational articles about trading strategies. Today’s topic is position trading — the long-term strategy. You will learn the main principles of the position trading strategy and find out when it is preferable to use it.
Position trading is a strategy where a trader opens a trade and holds it for a long time (several months or even years). The main idea of this strategy is to buy an asset at a low price and sell it at a high price. Position trading can be used for all types of investments. But the ones with lower volatility are preferable.
Position trading stands out with its long holding period and low trading activity. Position traders study the market in search of long-term trends. They do not care about short-term price fluctuations. That is why finding an asset with a long-term trend is essential.
Position trading strategy: main principles
Position trading is based on the fundamental analysis of the market and on the analysis of macroeconomic indicators in particular. The main principle of this strategy is to get a long-term profit based on long-term trends. The leading indicators used in this strategy are:
Position trading strategy: when to use it?
This strategy is best suited for a quiet market with a stable trend. Position trading is unsuitable for volatile markets as it involves high risks.
The main advantages of this strategy are:
It is based on long-term trends;
Uses macroeconomic indicators;
It is suitable for large time frames;
Hold time is at least a week;
It is not very time-consuming.
The disadvantages are the following:
Not suitable for volatile markets;
Requires significant capital.
When is position trading preferable?
Position trading is preferable in the following cases:
There is a long-term trend in the market;
There is substantial market support or resistance;
There are significant price fluctuations.
Most often, position trading is used in the foreign exchange market. But there are other asset classes where position trading may be preferable.
Position trading is characterized by its long holding times.
Position trading strategy examples
Example 1. USD/JPY
USD/JPY is one of the most popular currency pairs. A long-term trend characterizes the pair. The upward trend began in 2012, and the pair has been growing ever since. In 2019, the pair reached its highest level in more than ten years and continued to grow.
From a technical point of view, the pair is growing in a relatively clear channel. There are three price waves in the upward trend. A correction follows each wave.
The pair is growing in a channel.
The pair is in an uptrend, so a trader should buy it. The main task of a position trader is to buy the pair at the bottom of the correction. The trader buys the pair at the bottom of the correction and holds it until the price reaches the top of the next wave.
Example 2. Gold
Gold is one of the most popular assets among position traders. Significant price fluctuations characterize gold. For example, in 2016, gold fell sharply and lost more than 10 % of its value. But then the price recovered, and in early 2019, the price of gold reached a new high.
From a technical point of view, gold is growing in a channel. There are three price waves in the upward trend. A correction follows each wave.
A trader should buy gold at the bottom of the correction and sell it at the top of the next wave.
Example 3. Bitcoin
Bitcoin is one of the most popular cryptocurrencies characterized by very significant price fluctuations. For example, in late 2017, the price of Bitcoin rose sharply and reached a high of more than $20,000. But then the price fell sharply and lost more than 90% of its value.
But then the price started growing again. The price of Bitcoin has been increasing steadily since early 2019.
A trader should buy Bitcoin at the bottom of the correction and sell it at the top of the next wave.
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