A position trader is a type of trader who holds a position in an asset for a long period of time. The holding period may vary from several weeks to years. Other than “buy and hold”, it is the longest holding period among all trading styles.
Position trading is pretty much the opposite of day trading. A position trader is generally less concerned about the short-term drivers of the prices of an asset and market corrections that can temporarily reverse the price trend.
Position traders place more emphasis on the long-term performance of an asset. From such a perspective, the traders are closer to long-term investors rather than to other traders.
The goal of position traders is identifying trends in the prices of securities, which can continue for relatively long periods of time, and earning profits from such trends. Generally, position trading may provide lucrative returns that will not be erased by high transaction costs.
Approaches of Position Traders
Position trading generally involves the utilization of both fundamental and technical analyses.
Fundamental analysis is especially important to position traders who expect to hold the assets for a longer time frame. Fundamental analysis in position trading is frequently associated with stock-picking. It allows traders to find winning stocks that may provide high returns.
Technical analysis is used to identify trends in asset prices that will allow a trader to earn profits. In addition, it aims to identify trends that will last long enough and provides warning signals of potential trend reversals
Technical analysis usually provides position traders with two options: trade the assets with strong trending potential that have not yet started trending, or trade the assets that have already begun trending.
The first option may provide higher returns, but it is riskier and more research-intensive. On the other hand, the second option is less research-intensive, but the trader may miss the momentum to earn substantial profits.
Risks with Position Trading
Similar to other trading strategies, position trading is associated with some risks. The most common risks of position trading are:
Trend reversal: An unexpected trend reversal in asset prices can result in substantial losses for the trader.
Low liquidity: The capital of position traders is usually locked up for relatively long time periods.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
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