What it means
Position traders look for big, sustained moves in a share, currency, commodity or index. They base decisions on broad factors such as the economic cycle, industry trends, company earnings and long-term chart patterns.
Because they hold for a long time, they do not need to watch the screen all day. The approach has some practical advantages.
Trading fewer times means lower transaction costs, and a longer holding period gives a trend time to develop. The cost is that capital stays tied up, and the trader must be willing to sit through temporary losses without panicking.
Risk control is central. Since a position may run against the trader for weeks, many set a stop-loss (a pre-set price at which the trade is closed to limit the loss) and size each position so that a failed trade costs only a small slice of the account.
A common rule of thumb is to risk no more than 1% to 2% of the account on one idea. Position traders also have to think about funding and carrying costs.
Holding a leveraged position, borrowing to buy shares or rolling futures contracts all add costs over time, and these can quietly eat into returns on a long hold. Dividends, interest and tax treatment of long-held gains are further points worth checking.
Compared with a buy-and-hold investor, a position trader is more willing to sell when the trend turns. Compared with a swing trader, who holds for days to a few weeks, the position trader accepts bigger price swings in exchange for catching larger moves.
Discipline matters more than prediction. Many position traders accept that they will be wrong on a good share of their trades, and they rely on keeping losses small and letting winners run.
A system that wins on only four trades in ten can still make money if the average gain is much larger than the average loss.
In practice
Real-world examples.
Example
A trader believes rising demand for electric vehicles will lift lithium prices over the next year. She buys a lithium mining share and holds it for eight months, ignoring weekly noise.
Example
A currency trader notices that central bank policy in two countries is diverging. He holds a position in the stronger currency against the weaker one for several months, adding to it as the trend continues.
Example
A trader at a small investment firm follows commodity cycles and holds oil futures for a quarter at a time. Each quarter she rolls the contract forward, and she counts the roll costs when judging whether the trade made money.
Formula
Calculation
Position size (shares) = Amount risked / (Entry price - Stop-loss price)
A position trader has an account of $200,000 and will risk 1% on a trade, so the amount risked is $200,000 x 0.01 = $2,000. She plans to buy at $50 with a stop-loss at $45, a risk of $5 per share.
Position size = $2,000 / $5 = 400 shares. The cost of the position is 400 x $50 = $20,000, which is 10% of the account, and if the stop-loss is hit the loss is 400 x $5 = $2,000, exactly the 1% planned.Case study
Seen in the real world.
Cedarbank Capital is a fictional trading firm that employs a position trader named Mara. She spotted a long-term decline in a shipping index and took a modest short position, sizing it so that a stop-loss would cost no more than 1% of her allocation.
The market bounced twice in the first month and she held on, because neither rebound broke her stop-loss level. In this illustrative case the position was closed five months later with a gain of about three times the amount she had risked, and the firm credited the result to patience and strict sizing rather than to prediction skill.
Her trading journal records the reason for entry, the stop-loss level, the target and what she would do if the trade moved against her. Reviewing the journal each quarter showed Mara that her best results came from trades where the plan was written down before entry and followed without changes. The firm now asks every trader to keep the same record, since it turns a loose hunch into something that can be reviewed and improved.
Watch out
Common mistakes.
- Holding a losing position for months with no stop-loss, hoping it will come back.
- Ignoring carrying costs such as interest on borrowed money or futures roll costs over a long hold.
- Putting too much of the account into one position because the long timeframe feels safer.
Questions
People also ask.
How long does a position trader hold a trade?
Typically weeks to months, and occasionally longer, depending on how long the trend lasts.
Is position trading the same as investing?
Not quite, because investors usually buy for fundamentals and hold indefinitely, while position traders plan to exit when the trend ends.
Do position traders need a lot of capital?
Not necessarily, but they need enough to survive normal swings against them without being forced to close early.
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