Bill Williams is the creator of some of the most popular market indicators: Awesome Oscillator, Fractals, Alligator, and Gator.
Position trading strategies: retake
2022-08-26 • Updated
Information is not investment advice
The two sides
There are different trading styles that result from different financial objectives set by each trader. Those who want to get quick profits by frequent small gains go for scalping or any other intraday trading approach. On the other hand, those who prefer seeing their profits less frequent but more substantial go for long-term trading. That is position trading.
It is called position trading because a trader chooses to hold a trading position (or positions) for a long period of time: days, weeks, months. While others would have closed hundreds of orders, a position trader may hold just one open order for a very long period of time waiting for the planned levels to be reached to close the deal.
Psychologically, this strategy is comfortable for those who prefer investing a lot of time in fundamental research of a chosen asset. Once the research is done and a long-term trade decision is taken, a trader can sit back and relax, leaving it for the market to make the profit. Therefore, the methodology here relies on long preparation and long waiting – this is what takes most of the traders’ time here. In the meantime, the process of opening and closing positions – meaning, what takes most of intraday traders’ time – is reduced to a bare minimum. That’s why “zero hustle” is a definite psychological advantage of this approach for those who prefer a thorough silent study and a sniper-style decision making.
On the other side, once you make a decision, you are supposed to hold your position through days and weeks of market fluctuation. Psychologically, it is very hard: the unpredictability and volatility of the market are still there, and it doesn’t care if you spent weeks studying a single asset and it’s historical behavior. That’s why this strategy may be very unnerving for those who are not prepared to withstand emotional pressure while waiting for the planned moment to close the position. Obviously, “going with the flow” or “improvising on the way” is completely out of question in this approach. You calculate, press buy or sell, and watch the market do whatever it likes to do before – hopefully – after a lengthy period of time it finally comes to where you expected it to come. That means, you only choose this strategy if you are prepared to witness all kinds of market fluctuation and unfavorable moves for you in no action because this is what means to hold your position.
Clearly, steel nerves are not the only thing that is required to make this strategy work. To be able to withstand the market fluctuation, a trader needs to have a very significant fund because only a good reserve may absorb all kinds of unfavorable volatility without leading to margin calls or any other kind of strategy disruption. Also, a trader needs to thoroughly calculate a required size of opened trade in relation to the total deposit: the lower the size of the trade against the total account fund, the less the impact of volatility and the bigger the probability that the fund will see this trade through the required time. That’s why going “all in” and investing $1 at 1:000 clearly is not an option here.
Here is the sequence of steps you would go through if you decided to practice position trading.
First, you take a fundamental and long-term of the market. For example, you come to the conclusion that in 3 months gold will rise in value from the ranges of $1 950 to $ 2 200. You check several sources, you make long-term technical analysis, and become convinced that in the long-term, 3 months more or less, that’s a big probability.
Then, second, you open a position in gold - and keep it open for 3 months with Take Profit in the ranges of $2 200 at Stop Loss below $ 1 880.
Third – you do nothing. You just wait and see gold rise to $2 200 as you have analyzed. You don’t close the position if reaches $ 2 100, you wait for the automatic closure at $2 200. You don’t close the deal if it drops to $1 900 – you let your Stop Loss guard your interest. In general – you don’t touch the keyboard. The approach is: you opened your position based on fundamentals. Therefore, only a drastic change in fundamentals should warrant changing or closing the position against the plan.
Obviously, from the financial point of view, it works best if you have a zero or minimal swap so that the waiting time costs you either nothing or a minimal amount compared to the expected profit. Also, before opening the position, you have to calculate the span of the worst-case dropdown scenario your asset can go through – to make sure that your deposit will withstand it and absorb the fluctuation. For that, you need to calculate the cost of the pip (here is a guideline with the math for it) on your traded asset in relation to how much lots you trade, what profit you are expecting to have, and what your leverage is. Once you checked that the fluctuation of your asset’s price doesn’t pose a threat erasing your entire deposit – you go on opening the position.
Position trading is a very simple and effective strategy if you are conscious of how it works. If you are, then there may be no better strategy for you. Read, analyze, open position – and come back in a couple of months to see the fruits of your preparations grow.
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