Position trading is a popular and widely used investment technique that allows traders and investors to hold their positions open overnight or for several days up until a week. This technique aims either to take advantage of significant price movements or to implement market timing strategies rather than day trading, where traders close their positions every day. Visit this site for more information.
There are two main types of position trades: long trades and short trades. Long trades benefit from an increase in value, whereas short trades benefit from a decrease in value. This article provides an overview of financial instruments commonly used by Australian traders who engage in these types of transactions, such as CFDs, futures contracts, warrants and options. Furthermore, it covers some simple risk management techniques that can be applied to protect profits and limit losses.
Advantages and Disadvantages Position Trading
There are many benefits of using position trading as your investment strategy, including:
- Reduced market exposure: investors can hold their positions open for a long time which reduces the amount of capital required to trade;
- Greater price stability: when compared to day trading, the prices of assets tend to be more stable over a more extended period; and
- Profit opportunities: because position traders buy and sell over a more extended period, they may have the chance to make more profitable trades than day traders.
However, like with most investment strategies, there are also some disadvantages, including:
- Lower liquidity: due to the current regulatory framework in Australia placing limits on trading hours and having a significant gap between buying and selling prices
- Higher risk: because of longer holding times and therefore more significant open positions, traders can be exposed to more risk; and
- More significant capital requirements: position trades require access to more funds than day trading.
How to Master Position Trading
Choosing the Right Financial Instruments
There are a variety of financial instruments that you can use for position trading, including CFDs, futures contracts, warrants and options. CFDs (contracts for difference) are a popular choice. They offer high liquidity and allow investors to trade on margin, which means they can hold a more significant position with a smaller investment. Futures contracts are similar to CFDs but are traded on an exchange and have set expiry dates. Warrants are securities that give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a given date. Options are contracts that give the buyer the right, but not the obligation, to purchase or sell an underlying asset at a specified price on or before a given date.
Understanding the Risks
All investment strategies carry risk, and position trading is no exception. The main risks associated with this technique include higher exposure to price movements (both up and down), liquidity issues and counterparty risk. Therefore, traders must understand these risks before entering into any position trades.
Using Risk Management Techniques
Risk management is essential for all traders but is especially important for those using position trading as their investment strategy. Several risk management techniques can be applied, including setting stop losses and taking profits, hedging positions and diversifying portfolios. By implementing these techniques, traders can help limit their losses and protect their profits.
Testing Your Strategy Before Trading Live
Testing is an integral part of the investment process as it allows traders to assess different market conditions, identify potential risks and perfect their strategy. Traders should engage in two main types of testing: paper trading and strategy testing using historical data. Paper trading involves simulating actual trades without placing any money on the line. The advantage of this technique is that it forces you to follow a specific strategy without risking any capital. Strategy testing using historical data enables traders to perform back-testing or forward-testing for various markets, instruments and timeframes.
By mastering these techniques, traders will be equipped with the skills needed to engage in position trades and achieve the desired results confidently.