Position traders in the Foreign Exchange market base their long-term positions on macroeconomics and charts that indicate trends over a long time period. The time span of these trades may range from a few months to years on end. Individuals engaging in this type of trade hardly consider the short-term movements in price, instead of concentrating on the trends showing long-term movements and trying to pinpoint them.
As a Forex trader dealing in positions, you should understand the basics and have the patience needed to hold your position for a long period of time. Let us look at what position trading is in detail and some useful trading approaches related to it.
What is forex position trading?
Several merchants set lofty goals while dealing in the Forex market, where they want to earn millions of dollars using only a moderate amount of money. While it is not entirely impossible, the chances of this occurring are quite low. Here is where long-term strategies come into the picture because they give traders a higher chance of making huge profits in the Forex market.
The Forex market attracts traders mainly due to its fast movements and all-day trading nature, but there are a few people who concentrate on the long trends and the key areas for resistance and support. People who want to trade for a limited time frame or those who want to use both short-term and long-term strategies are attracted to position trading.
Even some of the most seasoned merchants hate monitoring their trades, and for them, position trading is a perfect way to make good profits. By risking as little as 200-300 pips, they can make thousands of pips potentially. The chief objective of the position trading scheme is that the worth of the currency pair would increase over time.
Pros and cons of position trading
The advantages and disadvantages of Forex position trading are as follows:
- It does not require you to spend much time, and you only need to spend a few hours every week to analyze the market.
- Long-term position trading involves wide stop-loss orders, which means the market noise has a lesser chance of stopping out your positions.
- It allows you to avoid the daily shifts in the market and lets you remain unaffected by high-frequency trades.
- Forex position trading is a stress-free affair since you do not need to worry about major economic events.
- Wide stop-loss orders make the average risk for each trade much bigger.
- Since you invest your capital for the long term, you may miss out on short-term trading occasions.
- The security of your funds is an issue, so you must choose a broker who can be trusted.
4 position trading strategies
Let us look at some of the top Forex position trading strategies.
Support and Resistance
A position trader has to keep a close eye on support and resistance levels because they tell them in which direction the price is advancing. Hence, you will be able to make better decisions in regards to opening and closing your positions. If a price level has a history of not falling for several years, it is termed a support level, while a resistance level is defined as an unbreakable price level holding its status for many years.
If, while trading in Forex positions, you anticipate a resistance holding for a long period, you have the option to close your positions before the opportunity to cash in on potential profits disappears. Furthermore, if you anticipate a long term trend to remain as it is and shoot further up, you can enter the long positions for support levels.
This Forex positions trading strategy demands you to study charts and find out the resistance and support levels in them. In this regard, past price behavior is your best source of information, and you can easily spot the levels at times of important market shifts. You can also get an idea about future levels through past levels that indicate the future.
After the breakage of a resistance level, it may become a support level. You can also get dynamic levels moving along with the price through technical oscillators like Fibonacci and moving averages.
Moving Average Indicators
The type of moving average you are dealing with while position trading is not that important. The vital thing to consider is how many periods of it can be utilized by you. Price action is heavily influenced for the long term by the 200- and 50-period moving averages, but if you want some more information, you ought to monitor the 100 and 500 periods as well.
From the above chart, you can see that following the breakage of the downward trend by the USD/JPY pair. A double bottom confirmation takes place. This is a strong opportunity, and you can see that the following five months show a bullish direction for the pair, with the profits being about 20% or so.
A breakout is said to have taken place when the price goes beyond the resistance and support levels, thus signaling a market sentiment shift. If you wish to detect new trends, this strategy will serve you well. It gives an early indication of a market shift.
Pullback and retracement
When an asset is trending upwards but reverses for a short period of time, a pullback is said to have occurred. Traders often take advantage of these short reversals, buying low and selling high after the upward movement resumes.
Position trading holds great prospects if you are able to make informed forecasts regarding Forex market trends and have a sound grasp of how various market factors influence currency pairs. It involves a significant amount of capital, however, and you should be prepared to wait for a while.