Position Trader

An individual/entity who places trades based on the longer-term fundamental market bias of a particular asset/instrument for a period ranging from months to years.

Author: Edwin Saile
Edwin Saile
Edwin Saile
Banking | asset management

Edwin Saile, a dedicated professional with a Bachelor of Commerce in Banking and Finance from the University of Malawi, possesses over 4 years of expertise in trading financial instruments, specializing in gold, stock indices, and foreign exchange.

His seasoned background includes roles at NICO Asset Managers Limited and presently at the National Bank of Malawi, showcasing a wealth of experience in asset management and investment. He excels in technical and fundamental analysis reflecting a deep understanding of financial markets and adeptness in analytical strategies.

Reviewed By: Himanshu Singh
Himanshu Singh
Himanshu Singh
Investment Banking | Private Equity

Prior to joining UBS as an Investment Banker, Himanshu worked as an Investment Associate for Exin Capital Partners Limited, participating in all aspects of the investment process, including identifying new investment opportunities, detailed due diligence, financial modeling & LBO valuation and presenting investment recommendations internally.

Himanshu holds an MBA in Finance from the Indian Institute of Management and a Bachelor of Engineering from Netaji Subhas Institute of Technology.

Last Updated:December 1, 2023

What is a Position Trader?

A Position trader is an individual/entity who places trades based on the longer-term fundamental market bias of a particular asset/instrument for a period ranging from months to years. These traders execute a relatively large volume of short and long trades.

They are commonly high-net-worth individuals or large corporations with high trading funds and the capacity for advanced market research tools. This is because position trading requires significant funds to withstand the fluctuations of longer market bias.

Understanding the Position Trade

Why become a position trader? The goal is to maximize their profit by capturing long-term price movements while minimizing the time they have to spend on the charts analyzing the market and searching for trade entry opportunities.

This is a crucial distinction in contrast to those holding positions during the day and close by the end of the day, commonly known as day traders. 

They will purchase securities, hold them for some time, and then sell them at a remarkably higher price. 

Besides maximizing worth and minimizing time spent on charts, they aim to reduce the stress associated with market spikes, FOMO, and the urge for precision entries. As a result, position traders execute their trades with calm and confidence.

Some commonly traded instruments are stocks, bonds, futures contracts, and cryptocurrency. These instruments have a general fundamental outlook that can be predicted, with some luck, through advanced analysis.

Examples of these traders include but are not limited to hedge funds, mutual funds, insurance companies, people less skilled at trading (copy traders), and risk officers (hedgers), among others.

What is position trading?

Position trading is an investment strategy that involves purchasing and selling securities over a long period, say months or years. Having a large number of funds is exceedingly helpful for this strategy. This is because stop losses for such positions must be wide enough to avoid call-outs.

However, this trading strategy can be very lucrative as it offers high price movements given the period of holding the asset, particularly in a trending market. Moreover, this strategy is also good as it covers transactional costs due to the prominent positions.

Position traders typically seek to buy instruments at the beginning of a trend and then sell them at higher prices (end of a movement) to cash in. 

However, to gain profit, traders can do the exact opposite: selling at a high price and buying at a lower cost to profit from the difference.

A trader might also use this strategy to hedge against other investments such as bonds or commodities.

For example: If an investor's long-term portfolio consists of Apple stock and the market crashes, they can hedge this position by selling Apple stock, buying put options, etc. 

One key thing to remember about position trading is that it is considered investing rather than speculating because you hold the investments over a long period.

Therefore, it is value-oriented for investors. This is why position trading is less risky.

Requirements for position trading

To best be suited for position trading, it is imperative to have quality research about the underlying assets. This is because predicting a trend is accessible in the financial markets. Therefore, an in-depth analysis must be conducted to identify the beginning of a movement.

Knowing when a trend is losing momentum and when a reversal might likely occur is also imperative. This helps to avoid missing optimal exit points and reduces the amount that could have been made.

Market analysis for position trading must encompass all the factors in the economic environment, including the likelihood of any critical events that might affect the prices of the underlying assets.

Some of the factors that have the capability of leading trend reversals include: 

  • The likelihood of wars
  • Recessions
  • Change in governments
  • Natural disasters
  • Significant economic variables, e.g., interests rates and economic policy

Advantages of position trading

Position trading offers the advantage of not staying glued to the charts as day traders do. Because the trade goals are long-term, these traders place their trades and then wait for months before they even look at the charts.

Position trading also gives the privilege of catching all profits within a trend instead of entering and closing trades intraday. Moreover, because the positions will have already been placed beforehand, it accumulates all the pips (a measurement of price movement) along the way of the trend until its end.

Position trading also gives people with other things to do the chance to participate in the financial markets. For example, professionals like doctors, whose time is limited, don’t have to be glued to the charts.

This strategy also favors big corporations with enough trading funds to build longer-term portfolios, thereby reducing the risk of opening several short-term positions. Significant funds help these corporations accumulate profits by the end of the trading period.

Position trading enjoys economies of scale, as the costs associated with trading are distributed across large profits from longer-term positions. Costs associated with trading include brokerage fees, spreads, and other operations cost like internet and trading equipment.

Disadvantages of position trading

The risks of position trading are not the same for all individuals. Some position traders with robust strategies can build enough capital to be set for life. However, some investors will run into trouble if they're not careful.

For example, if you position trade without a proper fundamental backdrop, you might take on more risk than you are comfortable with. This could lead to over-leveraging, resulting in more significant losses in the future.

You should always make sure that your trades are calculated based on factors you can predict to ensure success. This is because a position trader has to be right about the trend prediction. Otherwise, they might lose a significant portion of their investment.

They should be aware that the risks of day trading include the following:

  • Trend reversals. A strong trend can suddenly reverse, leading to a loss of funds. This could be due to a sudden market event that affects the underlying asset price, e.g., Natural disaster and war. 
  • Low liquidity. Vast chunks of capital can be tied up while position trading. This means those funds are inaccessible to other investment avenues for a significant time. This poses substantial opportunity costs in the market.
  • Position traders may get caught up in the excitement and buy securities that will not go higher or sell securities that they believe will go down in value despite being told otherwise. This can lead to losses for individuals.
  • This type of trading requires much more research and dedication because trends rarely occur and must be determined by analyzing complex market data. So, position traders must study a chunk of market information to predict a longer-term market trend.

Is Position Trading for You?

This type of trading can be quite challenging to anyone new to the trading world. It is a matter of preference for every individual. Some prefer to speculate in stocks, while others look to safer places like mutual funds.

Capital is a crucial constraint for anyone looking to start their career as a position trader because it ties up a large amount of capital for a long time. We have listed some pointers to guide you in becoming a position trader.

  • First, you need basic knowledge about investing in the stock market, risk management, brokerage & taxes, capital, etc.
  • Spend a lot of time studying charts, understanding market fundamental drivers, and perfecting your strategies. Make dummy paper trades to track the success ratio of your trading strategies.
  • Control your emotions when you are on the losing side. Know that the market is supreme and accept ‘small’ losses. Revenge trading will wipe you out.

Position trading markets

Position traders choose assets and markets in trending states rather than those that experience high ranges and volatility. This is because stable markets are easier to predict in the long run, making them more profitable for position traders.

1. Position share trading

These traders prefer stocks or shares because the fundamental data underlying share prices give more insight into the overall direction of the stock in question. In addition, company earnings, as well as management itself, can guide investors in the direction of the market.

Despite timely announcements that may affect the price of the stocks, it is common for stores to take one direction because companies are working day and night to improve the sentiments of their company and, hence, share price.

2. Position commodity trading

Similar to stocks, commodities follow cleaner and longer trends than other markets, such as cryptocurrencies and currency pairs. They may experience volatile moments occasionally, but those moments are often short-lived. 

Examples of commodities following long trends include precious metals like gold, silver, and copper and other items including oil, wheat, and coffee. The strategies for analyzing any of these lies in the underlying fundamentals of the asset. 

3. Position index trading

One of the preferred instruments for position traders is indices. These may be stock indices, currency indices, or commodity indices. These indices are a weighted average of prices of several assets in a class of instruments.

A good example includes stock indices like the S&P 500, representing the weighted average price of Fortune 500 companies on the New York Stock Exchange. Likewise, the Nasdaq represents a prestigious group of tech companies in the United States.

The reason why indices follow long trends is that they reflect the overall state of the economy of the underlying country. If a sector is doing well, most of the stocks in that sector are prone to experience booms. This ultimately carries over into the indices.

For this reason, indices are regarded as indicators of the economy's state over time. The same applies to the dollar index, a weighted average of the major trading currencies with the dollar, such as the euro, pound, yen, swiss franc, etc.

Position trading indicators 

Although most position traders use fundamental data to analyze the market, they also use some technical indicators, especially trend indicators, to gauge the market's overall direction. One of the most commonly used indicators is the long-period moving average.

Moving averages are dynamic support and resistance lines formed by the underlying assets' previous prices. These averages can be plotted on different time frames depending on the scope preferred by the trader.

Generally, when the price is beginning to trend up, investors buy once the price touches the moving average on the way up, thus acting as support. Inversely, they sell when the price dips below the moving average, as it can act as resistance.

Traders may also use several moving averages on a chart to determine when a trend is beginning or ending. Ideally, when short-term and long-term moving averages are plotted together, the crossing of the two tells a story.

When a short-term moving average crosses a long-term moving average, investors interpret that a reversal is about to occur in a downtrend. This leads most to close their short positions and go long.

The inverse happens in an uptrend when the long-term moving average crosses the short-term moving average on the way up. Moving averages can range from simple to exponential, depending on the investor's preference.

Researched and authored by Edwin Saile | LinkedIn

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