Position trading in forex entails holding onto trading positions for an extended period. Unlike day trading or swing trading, position trading involves holding onto your currency trade for extended periods, ranging from weeks to even months.
Similar to swing traders, position traders seek out trends and employ a blend of fundamental and technical analysis to identify their entry and exit points.
FX position traders have a unique approach to trading markets, resembling more of an investor mindset. This article will delve into the specific skill set they employ and explore other aspects of their trading strategies.
Which Type of Forex Position Trader Is Most Common?
A forex position trader engages in a significantly lower number of trades compared to other types of traders. They may carry out around ten transactions annually on a central currency pair, while a day trader may execute hundreds, if not thousands, of trades per year.
They have a tendency to engage in single security trades rather than conducting multiple trades simultaneously.
Position traders are not as concerned with the spread and commission expenses but instead focus more on the overall cost of the trade. For instance, individuals will find out whether they need to pay swap or holdover fees to remain in the live position for an extended period.
Position traders also grasp the significance of hedging as a trading tactic, and they might utilize what the industry calls a carry trade strategy. Now, let’s briefly examine these two concepts, starting with hedging.
Utilizing Hedging as a Component of Trading Strategy
If you have a bullish outlook on the USD, it is wise to have a bearish stance on the EUR. In the same vein, if you have a bearish position on USD/CHF, you may consider taking a bullish stance on EUR/USD due to the solid inverse relationship between these two currency pairs. This example demonstrates a strategy involving taking a long position on EUR/USD while simultaneously taking a short position on USD/CHF and vice versa.
However, hedging can be even more straightforward. For example, if you’re an investor with a long-term perspective, you may have a negative outlook on the USD in the long run but a positive outlook on US equity markets. This is because you believe that when risk appetite is high in equity markets, investors tend to avoid the USD.
The majority of forex position traders operate within the institutional sphere, mitigating currency risk for their corporate clientele. They engage in extensive buying and selling of currency to safeguard their clients’ overall profits during the import and export of goods.
Various Strategies for Position Trading
Forex position traders employ distinct trading strategies in contrast to other styles like scalping or swing trading. They search for additional conclusive proof that a substantial change in sentiment has occurred in the value of a currency prior to making a trading choice.
Forex position traders may choose to wait for multiple sessions to pass or even several days before committing. Similar to other traders and trading strategies, they will utilize a blend of fundamental and technical analysis to arrive at their decision.
However, they will consider the broader macro and microeconomic indicators, including policies related to interest rates. In addition, they could examine the dedication of traders in their efforts to forecast market trends.
The COT Report Is an Invaluable Publication for Position Traders
The COT, also known as The Commitments of Traders, is a market report that is released on a weekly basis by the Commodity Futures Trading Commission. This report provides valuable insights into the positions held by participants in different futures markets within the United States.
The CFTC gathers the report by collecting weekly submissions from traders in the markets. It includes information about their positions in futures on various commodities such as cattle, financial instruments, metals, grains, petroleum, and more. Chicago and New York serve as the primary locations for the exchanges.
The Significance of the Indicators of Trading for Position Investors
Position traders tend to focus more on their economic calendar compared to scalpers and day traders. The latter group relies on technical analysis to react quickly to immediate price movements. However, it does not imply that position traders completely disregard technical analysis.
It’s essential to keep in mind that the majority of the technical indicators we use on our charts to make decisions have been around for many years, with some dating back to the 1930s.
Therefore, these indicators, designed to function on weekly and monthly charts, are theoretically more precise on more extended time frames and operate more effectively for position traders.
Position traders often rely on various technical indicators such as moving averages, the MACD, RSI, and stochastic indicators to inform their decision-making process. In addition, they may utilize candlesticks and likely rely on the daily candle formations to strategize their trades.
In general, their approaches will exhibit much more incredible patience in contrast to day traders or scalpers. They might even choose to wait for an additional session or the day’s sessions to finish before entering or exiting the market.
Position traders also utilize stop orders, significantly trailing stop losses, with excellent efficiency and effectiveness. Traders often consider adjusting their stop loss to secure gains or avoid potential losses on a specific trade.
They have plenty of opportunities to do this as they can assess the pattern over multiple sessions and days. In general, it would be unwise for position traders to let a substantial profitable trade go to waste.
Nevertheless, the stop losses employed by such traders will have a significantly more comprehensive range compared to those used by day traders. A position trader may set a stop loss of 200 pips at a point where the trade would have turned unfavorable.
Comparing Forex Position Trading to Forex Swing Trading
As mentioned earlier, swing and position traders share similar characteristics. Both types of traders search for patterns, although swing traders focus on shorter-term trends in order to align themselves with the ups and downs of the market.
Common belief indicates that markets move within a range approximately 80% of the time, with only about 20% of the time being dedicated to trending. Swing traders aim to capitalize on the shifts and timing of market trends in order to generate profits. Consequently, they will develop a plan to capitalize on the current trends.
Position traders seek indications of a significant shift in the market they are engaged in. Can a central bank decide their interest rates or policies, such as lowering interest rates or scaling back monetary stimulus? They are seeking a sustained pattern to start evolving, supported by such a choice.
Forex position trading is an excellent option for traders who prefer a long-term approach and want to create a strategy that combines elements of both trading and investing in currencies.
Nevertheless, it is advisable to have a more significant margin and a trading account with increased capital in order to account for the possibility of stopping losses from being further away from the current price, as is often the case with day trading.
Position trading will inspire you to make well-considered decisions grounded in straightforward technical analysis and comprehensive fundamental analysis. However, it is crucial to be ready for the possibility of experiencing more substantial setbacks occasionally and maintain your belief until it becomes evident that your choice was incorrect.