The nature of any financial market is that long-term trends usually take several weeks and months to form. For those looking to strictly invest in forex rather than actively speculate, position trading may be a methodology worth considering.
It is somewhat better than a traditional investment as the investor has the luxury of profiting from going long and short instead of only buying. But, granted, it is probably the most challenging trading approach to practice. Thus, this article will provide all the main prerequisites to become a position trader in forex.
What is position trading?
Position trading in forex is a strategy where a trader holds their trades for several months or even years by taking advantage of long-term multi-month, and multi-year trends in the markets.
They achieve this objective by using advanced fundamental analysis and some simple technical tools like moving averages and support and resistance. Position trading is not a particularly appealing approach to most because of the severely limited trade frequency, capital requirement, and unusually long hold times.
Nonetheless, one of the advantages of this strategy is short-term fluctuations are irrelevant to the investors practicing it. It is also far less time-consuming than scalping or day trading. More pertinently, the main attraction of position trading is the potential rewards.
Taking advantage of big moves in the markets provides traders the best opportunity to maximize their gains. Achieving this objective is only possible through having the fortitude of holding positions for extremely long periods.
From a technical perspective, a position trader needs to focus on two elements: sophisticated fundamental analysis and technical analysis – primarily on the daily, weekly, and monthly time-frames.
Position traders need to have a brilliant understanding of macroeconomic factors for the currency pairs they are presently observing. In most cases, long-term trends in forex often begin from considerable leading economic shifts such as Interest Rate change, Gross Domestic Product, and even political changes.
Therefore, aside from regularly consulting an economic calendar, one needs to be updated with all the latest fundamental data, noting any preliminary reports, what market sentiment suggests, and analyze the impact of specific news releases.
Fundamental analysis is challenging, meaning traders need to simplify it by looking at what has historically been the main drivers of the particular markets they are currently observing.
There aren’t necessarily exclusive position trading strategies. What matters more is the point of reference. It’s a must for position traders to analyze higher time-frames, namely the daily, weekly, and monthly time frames.
For instance, using moving averages works for a vast number of traders, though with this approach, the investor will instead use bigger periods like 100 and 200 because such settings reflect the long-term trend.
Although appreciating the difference is simple theoretically, it is a substantial mental shift since higher time-frames are a lot slower than lower ones.
One of the problematic must-haves for position traders is being well-capitalized. Of course, forex accommodates small trading accounts, though it’s probably not worthwhile for position trading. It is one of the detriments of such a trading methodology.
If the opportunities for profiting are limited, it stands to reason a trader needs significantly more capital to make any decently considerable gains after a certain period. Although there is no set number necessarily, it’s safe to assume a real position trader must regularly trade a mini lot comfortably.
Let’s observe the value of this position on a pair like EUR/USD. A mini lot is typically 10,000 units of the base currency where every pip is worth $1 a pip. Presently, the weekly range for this pair is roughly 200 pips.
Consequently, 200 X $1 equals $200, which is effectively the risk on this position. Assuming a trader planned to risk 2% of their equity on any individual trade, they would need $10 000 as starting capital. Needless to say, this is just an example, though it should provide an idea of the value of the orders a position trader would typically execute.
We should emphasize that while trading fees are generally lower for position trading, it’s not a factor to ignore. A cost that might be impactful is the swaps a trader may incur for holding positions overnight, especially for exotic pairs.
It’s essential traders shop around for the broker offering the lowest swaps possible. Ideally, a position trader will need to negotiate for a swap-free account.
Now that we’ve covered the technical and financial implications of position trading, the last piece of the puzzle is acquiring the right mentality. This trading style is reserved for the more experienced speculator with a very long-term view of their positions.
Trades will inevitably be in the red for extended periods. For most, this undeniable realization is uncomfortable. Therefore, patience is the single most crucial psychological attribute with position trading.
Like any trading strategy, a position trader must be an independent thinker and have full conviction behind their trading ideas even if external evidence may suggest otherwise in the interim.
To conclude, below are the primary necessities for a position trader in forex:
- Technical analysis carried out on higher time frames.
- Advanced fundamental analysis looks at the historic main drivers of particular markets.
- A sizable trading account capable of executing positions worth at least a mini lot regularly and the one incurring little or no swaps.
- Incredible amounts of patience to forecasting long-term moves coupled with years of experience and independent thinking.