3:Position Trading Strategies
What is positional trading? Positional trading is a style in which traders buy and sell securities for the purpose of holding for several weeks or months. A position trader will typically use a combination of daily, weekly and monthly charts, alongside some type of fundamental analysis in their trading decisions. Essentially, a position trader is an active investor, as they are less concerned about short-term fluctuations in the market and look to hold trades for a longer term.
The key focus for a position trader is the reward to risk of a trade. Typically, as a position trader is looking to hold trades for several weeks or months, they often have lots of very small losing trades before one big winning trade. This allows the position trader to risk small amounts per trade, in order to increase the frequency of the number of trades taken so they can diversify their portfolio.
Positional Trading Strategy Example
Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument(CFDs, ETFs, Shares).Past performance is not necessarily an indication of future performance.
Most position trading strategy charts have three main components:
Daily chart timeframe or above (weekly or monthly chart).
A trend filter. In the above example chart, a one hundred period moving average is used as a trend filter and is denoted by the orange wavy line moving through the chart.
A trend reversal momentum indicator. In the above example chart, a MACD Oscillator is used to identify changing momentum and is found at the bottom of the chart.
As trading strategies are simply a set of rules and conditions to help in a trader's decision-making process, a trading strategy can be made using the three components listed above. For example:
Rule 1: When the price is trading above the moving average, only enter long, or buy, trades. When the market is trading below the moving average, only enter short, or sell, trades.
Rule 2: Only enter a long trade if the MACD Oscillator is above 0, as this represents momentum turning bullish. Only enter a short trade if the MACD Oscillator is below 0, as this represents momentum turning bearish.
In the chart above, the period in which both rules are met - price above the one hundred moving average and the MACD Oscillator above 0 - also represents the longest trending period. Of course, the trader still needs to find the right time to execute the trade and even if this is done correctly, momentum could turn in the opposite way, resulting in a losing trade.
However, it is these long-term trending conditions that a position trader tries to identify for trading purposes.
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