Intermediate Level

Learn more complex tools and techniques that will help you in trading.

Lesson 4: Position Trading

What is position trading and how
does it work?

Stock
trading involves keeping a position open for a long time to come. As a result,
a position trader is less concerned with short-term market fluctuations and
normally holds a position for weeks, months, or even years.

Place
trading can refer to either price speculation or investment speculation.
Investing is the most common form of position trading, with many position
traders having long-term investments in stock portfolios, funds or pension
schemes. Investment, however, is limited to going long, while position trading
with CFDs may also involve going short.

Place
traders often use fundamental analysis and technical analysis to determine
potential market patterns and risks before opening a place. The approaches
below can be used by position traders to evaluate price charts and forecast
market movements.

Support and resilience trading
strategy

Support
and resilience rates help position traders understand when asset price
fluctuations are more likely to fall to a downward trend or rise to an upward
trend. Based on their assessment, position traders can determine whether to
open or close their position on a particular asset.

The level
of support is the cost and the asset will not usually fall under, because
investors tend to purchase the asset at this point. Conversely, the level of
resistance is the point at which the value of the commodity begins to increase.
In this case, traders may choose to close their position and take profit
instead of retaining their position, only for the price to fall.

A support
and resistance trading strategy allow traders to analyze chart patterns–a
useful skill for position traders to have if they are to take long-term
positions on certain resources.

There are
three key factors to consider when trying to identify levels of support and
resistance.

  1. The
    historical price is the most reliable source of support and resistance.
    Typically, cycles of significant gains and price reductions will be used as
    prominent indicators of future movements.
  2. Likewise,
    position investors can see past levels of support and resistance as an
    indicator of future movements. For example, if the support level is broken, it
    could turn into a resistance level for future trades.
  3. Ultimately,
    technical indicators, such as the Fibonacci retracements discussed below,
    provide dynamic support and resistance levels that shift with the price of the
    asset.

Breakout trading strategy

Breakout
trading includes trying to occupy a position in the early stages of the trend.
Typically, a break-out strategy forms the basis for large-scale price
movements.

A breakout
trader will either open a long position after the stock price rises above the
resistance level or enter a short position after the stock falls below the
support level. To be a good breakout trader, you need to be confident in
recognizing cycles of market support and resistance.

Range trading strategy

Range
trading is a strategy that works best in a market that is constantly shifting
up and down. Forex traders especially profit from range trading because forex
markets do not always have a clear and obvious pattern.

A scope
trading strategy is best used by a trader who has established over-purchased
and over-sold capital. The goal is to purchase overs-old assets and sell over-sold
assets. In this case, the “over-sold asset” is one approaching the level of
support, while the “over-sold asset” is one approaching the level of
resistance.

Pullback and retracement trading
strategy

A pullback
is a temporary dip or a quick reversal of the prevailing upward trend of the
asset. Pullback trading can allow traders to capitalize on these dips or pause
in the upward movement of the asset’s value. The goal is to buy low and sell
high as soon as the asset moves out of the pullback and continues its upward
trend.

Pullbacks
are sometimes referred to as retracements, but they should not be confused with
reversals. Reversals tend to be long-term or irreversible deviations from the upward
trend.

One way to
determine whether a market dip is a pullback or a turnaround is to use a
Fibonacci retracement.

How do position traders use a
Fibonacci retracement?

Fibonacci
retracement is a method of technical analysis that can help position traders
determine when to open and close a position.

Stock
traders draw six lines across the asset’s price chart to measure Fibonacci
retracements. The first line is 100 percent, the next one is 50 percent, and
then one line is 0 percent. Despite this, position traders will draw three
additional lines at 61.8 percent, 38.2 percent and 23.6 percent.

Theoretically,
these proportions are aligned with the golden ratio, which can be used in this
example as a reference to where aid and resistance rates can be defined. It is
at these points that position traders may choose to open or close positions.

Conclusion

The
trading position sounds simple, but requires a comprehensive, fundamental and
technical analysis, as well as a thorough understanding of the markets. Here
are some key points to keep in mind for each strategy:

  1. Support and resilience levels help position traders know when asset price changes are more likely to reverse the downward trend or increase the upward trend. Support is the value and the asset will not typically fall under, and resistance is the point where the price of the asset appears to stop rising
  2. Breakout trading is a good strategy to be used in the early stages of the cycle, but finding trading opportunities allows traders to be confident recognizing times of market support and resistance Range trading is best used in markets that move up and down.
  3. Range trading is best used in markets that move up and down with no clear pattern, such as some Forex markets
  4. A pull-back trading strategy will encourage traders to buy low and sell high, as long as the asset’s value recovers after a temporary dip, instead of going towards a more permanent reversal.