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PR06 - Basics of Position Trading in the forex markets

"Just like stock markets have the buy and hold strategy, the same is applicable for the forex markets as well. Known as position trading, this is a style of trading where traders hold their positions for longer periods of time. Similar to stock investing, in forex, traders can either go long (or even go short) and hold on to that position that can span a few months to even a year. There are of course some inherent risks and advantages with position trading. For one, position trading is not suited for all forex traders. Even those who have some experience do not position trade due to the long term risks that are associated. But on the other hand, the profits one can make with position trading can be huge. As you might have already noticed, to be a good position trader, you need to have a lot of confidence in yourself and also be very patient to let the trade achieve the realized objective. In this article we look at what position trading is all about."

Position trading is the term given to a certain style of trading that includes holding a trade for long periods of time. The duration of holding such trades can span months as traders continue to hold their positions for the duration of the trade.

Position trading is somewhat akin to long term investing that one can commonly see in stocks. Often known as a buy and hold strategy, stock investors tend to invest in a stock and hold their positions for years.

This helps them to achieve big returns in the very long term. The same holds true in the forex markets as well. To be an efficient position trader, you need to focus purely on the fundamentals.

Due to the long term nature of these traders, a position trader is expected to be very patient to the point that they are able to absorb the swings in the market. One of the unique things about position trading is that the fundamentals trump the technical analysis.

Thus, it is automatically assumed that positions traders have a good understanding of the long term trends of the currency pairs that they are trading. Another thing that is unique to position trading is that investors also need to be well capitalized.

There are of course some apparent risks with position trading. Because volatility in the currency markets is high, you can expect the markets to reverse course mid-way. This brings the risk of all the unrealized profits being washed out.

Even though a trader might find themselves to be comfortable with their view of the markets, this can change overnight especially when the markets haven’t discounted a major event.

Therefore, it is only the most professional and experienced traders who can gain some kind of success with position trading. It is quite likely that position traders also engage in other derivatives in order to hedge their exposure to the markets.

Such derivatives include FX options or forwards to enable them to hedge the risk from the long term positions that they hold.

It takes a completely different mindset when it comes to being a position trader. This is something that you cannot hone overnight and probably need a lot of practice and years of experience.

Position trading basically aims to generate big profits over a span of a few months to a year. Given the fact that the forex markets can reverse course at the drop of a hat, this style of trading is quite risk, compared to stocks for example.

Position trading comes with its own set of problems that short term trading styles such as scalpers or day traders do not need to worry about. For one, because forex positions attract overnight swaps, a position trader will be left with either a positive or a negative swap.

Over a period of time, these swap rates can create a significant boost, or it could easily bleed your position as well. Therefore, traders need to be very careful when position trading for the long term. It is quite different from the long term buy and hold strategy for stocks.

Typically, traders are rewarded with dividends where applicable. These dividends can help the traders to make some extra money while keeping their position open. With the forex markets, this is true only if the overnight swap rate is position.

In the event that the position attracts a negative swap, the overnight swap rates which are applied on a daily basis can create a dent in your profits.

On the other hand, due to the fact that it is easy to short sell, you can also maintain a short position in the currency markets that you want to trade. This is not possible with stocks for example.

With this approach, i.e: the ability to go long or short with position trading allows traders to find profitable trading opportunities regardless of which way the markets are moving.

As we mentioned earlier, the trading psyche for a position trader is one that requires a lot of patience and most importantly confidence. Because the forex markets are constantly moved on a day to day basis by the ever changing fundamentals, position trading can create self doubt at times.

This is when traders who doubt themselves will end up liquidating their positions which could have otherwise yielded a profitable trade. You won’t be overtrading when you are position trading and of course, the costs you pay to your broker are lower (with the exception of the swap rates of course).

Read 899 times Last modified on Saturday, 13 July 2019 17:18