What is position trading in forex?
Position trading in forex involves taking long term trading positions. Compared to day trading or swing trading, you’ll stay in your currency trade for weeks or maybe months with position trading.
Just like swing traders, position traders look for trends and use a combination of fundamental and technical analysis to find their entries and exits.
In some ways, FX position traders are more like investors, and they use a different skill set to trade markets, and we’ll cover these skills and more in this article.
Who is the typical forex position trader?
A forex position trader takes far fewer trades than other types of traders. They might execute ten transactions a year on a major currency pair, compared to a day trader who’ll take hundreds if not thousands of trades a year.
They’re more likely to trade just one of two securities instead of having many trades live simultaneously.
Position traders are less fixated on the cost of the spread and commission and more occupied with the overall cost of the trade. For example, they’ll discover if they must pay swap or holdover fees to stay in the live position over a prolonged time.
Position traders also understand the importance of hedging as a trading strategy, and they may employ what the industry refers to as a carry trade strategy. So, let’s take a quick look at these two concepts, firstly, hedging.
Hedging as part of a position trading strategy
Many of you will know if you’re long USD, you probably should be short EUR. Similarly, if you’re short USD/CHF, you might want to be long EUR/USD because of the near-perfect negative correlations between both currency pairs. This example is a form of hedging: long EUR/USD but short USD/CHF and vice versa.
But hedging can be even more straightforward. For instance, if you’re a long-term investor, you might be short USD over the long term but long US equity markets because you believe investors shun the USD when risk appetite is high in equity markets.
Most forex position traders work at an institutional level, hedging currency exposure for their corporate clients. They will buy and sell vast amounts of currency to ensure their clients don’t lose out on their overall profits when goods get imported or exported.
Carry trade as a position trading strategy
The carry trade is the most classic example of a long-term position forex trade, and it’s a simple phenomenon to understand.
You exchange a low-interest rate bearing currency for a higher one. The theory is that when you need to transfer the higher interest-paying money back to your domestic currency, you bank the gains.
For instance, let’s say you are Japanese, and the Bank of Japan has a zero-interest rate policy. But a country close to Japan, both as a trading partner and geographically, has a higher interest rate. You change your yen into the other currency and remain locked in until a policy change occurs.
Many Japanese homemakers did this back in the 1990s, and many still use the carry trade today. Knowing that Japan’s banks were offering no interest on savings while inflation was running high, they moved currency into dollars like USD, NZD and AUD.
Back in the 1990s, they didn’t do it online; they’d swap the hard cash in money changing shops. It’s much easier and cheaper these days due to the growth of online trading and the birth of online currency exchange services.
Position trading strategies
Forex position traders will use different trading strategies compared to the other styles, such as scalping or swing trading. They look for more definitive evidence that a significant sentiment shift has taken place in a currency’s value before making a trading decision.
Forex position traders might wait for several sessions to lapse, or even days before committing. Like other traders and trading styles, they’ll use a combination of fundamental and technical analysis to make their decision.
But they’ll look at the broader macro and microeconomic indications, such as interest rate policies. They might also analyse the commitment of traders in their attempts to predict market direction.
The COT report; a valuable publication for position traders
The COT, The Commitments of Traders, is a weekly market report issued by the Commodity Futures Trading Commission revealing participants’ holdings in various futures markets in the United States.
The CFTC compiles the report based on weekly submissions from traders in the markets and covers their positions in futures on cattle, financial instruments, metals, grains, petroleum, and other commodities. Chicago and New York are the main places the exchanges are based.
The importance of the technical indicators for position traders
Position traders will analyse their economic calendar more than scalpers and day traders, who react to immediate price action using technical analysis. But that doesn’t mean position traders forgo all technical analysis.
It’s worth remembering that most of the technical indicators we place on our charts to make decisions are decades old, some invented back in the 1930s.
So, these indicators, created to work on weekly and monthly charts, are theoretically more accurate on higher time frames and work more efficiently for position traders.
Position traders might use moving averages, the MACD, RSI and stochastic indicators to make their decisions. They’ll also use candlesticks and probably use the daily candle formations to plan their transactions.
Overall, their strategies will be far more patient when compared to day traders or scalpers. They may even wait for an extra session or the day’s sessions to complete before entering or exiting the market.
Position traders also use stops, particularly trailing stop losses, efficiently and effectively. They’ll look to move their stop loss to lock in profit on a particular trade or prevent the position trade from turning into a loser.
They have ample scope to do this because they can evaluate the trend over several sessions and days. For the most part, it would be foolish for position traders to allow a significant winning trade to fail.
However, the stop losses such traders use will be much broader than that of a day trader. A position trader might have a stop loss of 200 pips if they place it where the trade will have gone wrong.
Forex position trading versus forex swing trading
As previously mentioned, swing and position traders have similar traits. They both look for trends, although swing traders look for shorter-term trends as they try to get in tune with the ebbs and flows.
Conventional wisdom suggests that markets range 80% of the time and only trend for 20%. The trend movements are where and when swing traders try to bank profit. Therefore, they’ll devise a strategy to exploit on the trends.
Position traders look for evidence that something has fundamentally changed in the market they’re trading. Could it be a central bank’s interest rate decision or policy change, such as an interest rate cut or reducing monetary stimulus? They’re looking for a long-term trend to begin developing underpinned by such a decision.
Forex position trading for beginners
Deciding to position trade begins with a simple choice; what style of trading do you prefer? You might have to experiment with a range of styles and techniques to find out which fits best with your lifestyle.
For example, scalping and day trading requires constant market monitoring throughout the day; this could prove difficult if you’re holding down a full-time job. Whereas if you swing or position trade, you only need to check in with your platform and live positions occasionally during the day.
Position trading could be considered the most effective method for new traders to get familiar with forex trading. If you’ve been a financial markets investor, then you could regard FX position trading as investing in currencies.
You’ll use similar long-term judgment to invest in currencies just like investing in stocks. However, there’s a fundamental difference between FX trading and buy and hold investing; you must learn how and when to short markets.
Position trading allows novice traders to take their time and to avoid emotional decisions. As mentioned earlier, they can use clean yet powerful trading strategies to go long or short. The golden cross and the death cross are excellent illustrations of how to use moving averages.
With the golden cross, you’d go long if the 50 DMA crosses the 200 DMA on a daily timeframe in a bullish direction. The death cross is the opposite phenomenon and shows a bearish market.
Also, the primary technical indicators are ideal for position trading. Not just because mathematicians created them to trade off higher time frames such as weekly and monthly charts, they should correlate more with fundamental analysis.
Suppose you pull up daily, weekly and monthly time frames and look to find the precise changes in long term trends. In that case, you’ll quickly see that the changes in direction (trends) will most likely relate to shifts in sentiment caused by significant announcements.
For example, if EUR/USD suddenly makes a turn, it could relate to an interest rate change by the Federal Reserve or the ECB or a change in their overall policy. For example, either central bank might have raised or lowered a key interest rate or announced they were cutting back on monetary stimulus and quantitative easing.
In summary, forex position trading is an ideal choice for long term traders who’d like to develop a strategy to set up a hybrid technique between trading and investing in currencies.
However, you need more margin and a trading account with more capital because your stop losses are likely to be further away from the current price compared to day trading.
Position trading will encourage you to make patient decisions based on simple technical analysis and more thorough fundamental analysis. Still, you must be prepared to accept more significant losses from time to time and keep your conviction until your decision has been proven wrong.
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