- Forex trading is also known as foreign exchange trading
- Traders participate in trading through banks, brokers, and other financial institutions around the world
- The forex market is the largest, most liquid financial market globally
- Position trading is a forex trading strategy that involves a trader investing in a position and generating profits from the changes in the asset price over an extended period
The forex market, abbreviated from the foreign exchange market, is an electronic marketplace where you can trade global currencies.
One currency can be exchanged for another to make a profit from price fluctuations. Forex traders can trade Monday to Friday across all time zones in a virtual 24/5 trading environment.
This market was worth US$2,409 trillion (US$2.409 quadrillion) in 2019 when the daily turnover reached US$6.6 trillion. Compared to other financial markets like the stock market, which lies at around $80 trillion, the forex market is the largest and most liquid market in the world.
As with all types of trade and investment, forex traders deploy several tactics and strategies to grow their assets and profits. We are going to take a closer look at position trading as a forex trading strategy.
What is position trading?
Position trading is a forex trading strategy where traders take an opinion on the market and hold it until it pays off.
This forex trading strategy allows traders to speculate on the currency’s long-term value instead of outright buying or selling. As a result, traders can benefit from any directional move in the currency they are speculating on.
How does the position trading strategy work?
Traders using position trading as their strategy will be taking a directional opinion on whether the currency will rise or fall in value over a period of days, weeks or months. Longer time frames offer more possibilities. In this sense, Position trading is a long-term trading strategy.
On the other part of the spectrum, we have short-term strategies, like Moving Averages Strategies, that capitalise on quick price action.
For example, suppose you buy AUD/USD, meaning that you think the Australian dollar will increase in value relative to the American Dollar. In that case, you might decide to keep your position open until it makes a profit. This can take weeks if the momentum turns against you. Therefore, position traders often bet in sustainable lot sizes and are not afraid of price swings in the short term.
If the price moves in your direction and forms a trend, you stand to gain more than with a single intraday position. Trends have more time to develop, bringing more potential for profits.
Main benefits of the position trading strategy
The main benefits of position trading revolve around its longer trading timeframe.
Position trading carries less stress than other strategies, such as intraday trading. This is one of the most attractive benefits as traders don’t deal with constant market swings.
Position trading is a less volatile trading strategy that is more open to risk mitigation. You will not need to react to every news and technical pattern since you are betting on a fundamental shift in price action over time instead of responding to chart patterns.
Price direction has more time to develop
Position trading offers more time for price directions to develop. Instead of jumping in and out of trades, position traders can create more accurate predictions of price directions by analysing trends over a longer period.
Why do traders participate in position trading?
Position traders only buy or sell one currency position at a time and hold it for days, weeks, months or in some extreme cases, even years. The position trader finally locks in a profit when it is due. Afterwards, they analyse and open another long-term position.
This means that while anyone with capital to invest can participate in position trading, the strategy is generally popular with conservative and beginner traders because of its relative stability and safety compared to short-term strategies such as intraday trading.
Traders may also participate in position trading simply out of personal preference.
Regardless, one common feature all position traders share is their ability to remain disciplined over a longer period. Additionally, as forex trading is never devoid of a certain level of risk, position traders, like everyone else, should take care to invest only what they can afford to lose.
How do position traders trade?
Position traders often research the market’s fundamentals before diving into a trade.
You are a position trader, and you are considering going short on AUD/USD.
You know that the Australian economy is often counter-cyclical and closely tied to the commodities market. The currency, in this case, reflects the overall economy. Your research tells you that the mining industry will underperform and that global coal and oil markets may take a substantial hit in the mid-term.
Meanwhile, USD looks good. The American economy is recovering, and it is poised for a big jump. However, political turmoil keeps investors at bay when exchanging American dollars for the Australian dollar. You believe that the market will eventually come to terms with the price of the currency. This week’s political drama could be old news before the following Monday.
With all this in mind, you decide to short one lot of AUD/USD. Your bet is underperforming for the first five days because the American president has said something reckless at the Town Hall meeting. You are currently down 50 pips from the entry position.
However, the sentiment changes by upcoming Tuesday and your trade increases in value by over 150 pips. You close the position eight days after opening to secure that 100-pip profit (50 pip drop – 150 pip rise = 100 pip profit – 0.5 pip in Rakuten fees = 99.5 pip of final profit).
Your final profits would look something like this:
99.5 pip * $10 (pip price for your position size) = $995.
You would make $995 in profit.
Imagine if you were to invest more – let’s say ten lots for the same position. If you had invested ten lots, your profits would grow to $9,950.
As long as you have enough capital to weather the pullbacks and storms, position trading is relatively safer than other strategies. Moreover, it allows traders to utilise their knowledge of market mechanisms such as supply, demand, and production capacities.
Position trading offers an understandable and straightforward way to approach forex markets. Therefore, it may be more well-suited for traders who are just starting out or those who prefer to trade from a more conservative standpoint.
The bottom line
Position trading is a strategy that allows traders to take relatively low-risk positions to capture profits.
For beginners or conservative investors, position trading strategies can be an excellent way of entering the market because it offers them more protection than other strategies while still providing great potential returns when done correctly.
With that said, it is essential to note that all forms of trading and investing come with risk. Traders risk losing their capital in every open position. Profits are not guaranteed. But, when done right, traders stand to make money with virtually unlimited upside potential.
Here at Rakuten Securities Australia (RSA), we offer competitive forex spreads for retail and professional traders. If you would prefer to practise placing trades before going live, you can sign up for a free demo account with us today.