Hello and welcome to another edition of the bulls vs the bears. How would you like to take 1 or 2 trades and rack up profits ranging from a week to several months. This is where position trading comes in. We are going to learn how to profit from position trading in the long term.
Unlike day trading position trading takes a long term view. See, with position trading, you can hold your trading positions anywhere from a few weeks to a year. You don’t need to stare at your PC screen all day. you enter your trade, and take a chill pill as your trading position racks up the profits. What we’re going to do is define what position trading is and we’ll look at tools you could use to help you profit as a position trader.
What is Position Trading?
Position trading is an investment method where a forex trader prime focus is on long term price movement. You don’t need to to take a truckload of trades in this scenario. You only take a handful of trades within the calendar year, but you have the option of tweaking them every now and then depending on what mood the market is in.
Now since you are in these trades for the long haul, you need to have a deep knowledge of fundamental factors that can influence price movements over the long term. By fundamental factors I am referring to social political and economic forces that may affect the supply and demand of a currency. Not only that, but your knowledge of technical analysis should be such that you should be able enter and exit trading positions at the right moments during the long haul.
In short, you need to know macro-economic data like the back of your hand. And your trade entries should be premised on sound fundamental analysis backed by sound technical analysis to time your trades to perfection.
What Are The Best Technical Tools For Forex Trade Positioning?
In case you don’t know already, trend lines are very effective tools that can help a forex trader identify trading opportunities on the charts. Price action and trends make a lot more sense on longer time frame charts such as the daily and the weekly charts. With that in mind, you could use trend line analysis to gain valuable insight into the forex market and ascertain where the trend is heading based on prevailing price action.
Next up is:
Support and Resistance
Support and Resistance Levels also play a pivotal role in position trading. When price action breaches a major support or resistance level, the next logical step, it just surges higher towards the next available resistance level. This surge takes place in case there is an upside break or price drops to the next lower support level in case of a downside break.
Next up is:
Moving averages are also valuable in identifying long term trades. They measure the average price over a specified number of time periods. The weighted volume and exponential increase mean very little. Your focus is the number of periods of the long term moving average.
Long term price action is more comfortable with the 50 and 200 period moving averages. However, keep an eye on the 100 and 500 moving average periods for possible clues. Let’s take a look at the price action in a position trading setup
Ladies and gentlemen, there lies a position trade on the weekly USD/JPY chart. As you can see a Double Bottom chart pattern pops up as a result of a breach of a huge bearish trend by the USD/JPY pair.So for the next 5 months the currency pair enjoy some dominance, chalking 20% gains in the process.
Now 20% in the scheme of things is quite huge. Why? Because this move came on the back of an unleveraged position. Even two thirds of such a move adds up to 70% on a 5 :1 risk/ratio. Even more you’d incur less transactional costs in the form of broker spreads and commissions- unlike day traders, who give away chunks of their profits to transactional costs.
For more information look up We Are Moving Averages I and II
Now let’s look at the Macroeconomic factors that I touched on earlier
Inflation sure influences a country’s currency. High inflation results in the increase in the price of goods and services. Consequently, people’s appetite for goods and services takes a dip, resulting in the economy catching a cold. Even worse, the country’s currency drops in value compared to other stable economies.
Low inflation is good news for a country’s currency. When this happens demands for goods and services surges up, and the currency also increases in value compared to other stable currencies. Not to mention the fact that demand for the currency also increases.
Central banks are an interesting bunch. Their job is to tweak interest rates to keep the engine of their domestic economies running, which, in turn encourages competition. As we all know, there is a correlation between interest rates, inflation and currency rates. As such, policy makers have the thankless task of keeping all three elements at peace with each other. This balancing act can be trick sometimes.
Someone is probably asking”How so?” Well, for instance, high interest rates can trigger huge interest inn foreign investments. Under normal circumstances this should cause a shot in the arm of a country’s economy. Even better, investors feel encouraged to pour their money into a country’s economy courtesy of the favorable interest rates of that country.
However, high interest raters can also trigger inflation; This can cause a country’s economy to overheat.. To make matters worse it makes goods and services more expensive. And when goods and services are expensive, it blunts your competitive edge.
Trade Balance of Payments
If you don’t know trade balance of payments let me tell you right now. Trade balance of payments simply means the difference between gross imports and gross exports. IF a country exhibits a negative balance, its imports more than it exports. This of course creates a huge deficit which sends the country scampering to look for cash to pay her lenders. The country’s currency suffers in the process as it value takes a tumble.
On the flip side, if a country’s balance of payments is positive, its exports are more than it imports. The country’s economy passes with a clean bill of health and all concerned can breath a huge sigh of relief.
Even more important is:
Economic and Political Stability
Investors take the economic performance of a country into serious consideration when deciding to invest in a country’s currency. IF a country’s economy is unstable it may cause political instability. They see such a country as an unattractive place to invest
However, if a country’s economy performs better, investors are more inclined to put their money where their mouth is. This then triggers a demand for that country’s currency, which of course results in a appreciation in value.
A classic example is the UK voting to stay out of Europe. It’s Brexit referendum split the country right down the middle. Consequently the pound crashed to a 32 year low against the Dollar. Let’s take a look at the price action that ensued as a result of this crash
Ladies and gentlemen, this is the GBP/USD chart after the BREXIT fiasco. Many investors abandoned the dollar and looked fo other currencies and assets such as gold to invest their money in.
Fortunately the Pound rebounded slowly against the dollar to end strongly in 2017. The moral of the story here is that investors mood can change rapidly. And it’s the job of the position trader to to capitalize on these mood swings when the opportunity presents themselves.
Now here a few position trading tips that will help you make informed decisions while you contemplate on your trades.
Study Economic Data Seriously
Your trading forecast should be founded on fundamental and macroeconomic data. You then confirm your fundamental data with price action analysis. Don’t forget to keep an eye on events around the world and look weaknesses in these economies and pounce when the opportunities present themselves.
Use Daily and Weekly Charts Religiously
The Daily and weekly charts are perfect for position trading. The daily chart gives you a few months to a year tom work with while the weekly chart gives you one to 5 years of price action.
Be sure to use the same roadmap when making your trade entries. You do not want to fall into the trap where you take a long term position based on a weekly setup, which only runs for a few months. But then you open a 240 minute chart only to discover an opposing price signal and run for the exit in a few days.
So basically you open with a position trading strategy only to fall into a swing trading trap. Avoid this mouse trap as much as possible if you don’t want to see your money go up in smoke.
Don’t Pull Your Hair Out Over Market Volatility
You don’t need to pull your hair out over market volatility. It’s the nature of the beast. IT’s natural that market trends do not always touch a trend line. As a matter of fact, you may get get faked out by false breaks sometimes. It happens. So get used to it.
How do you de-stress over this? Change your chart setting from a candle chart to a line chart and plot a trend line using the line chart. I hear someone saying”Now Why will I want to do that?”Because a line chart is founded on closing prices so all the price increases and loud noise you see on the candlestick charts can be cut down to a minimum.
Keep Your Eye On Strong Breakout Confirmation
Please do not just jump straight into a trade. Wait for price confirmation of a breakout about to happen-who cares where it’s happening on a trendline key support, e.t.c? When price eventually breaks a key level on a chart, just hold your horses and let the price buildup plays itself out.
The most likely thing to happen is price doing a U-turn and re-breaching the initial level. If price manages to breach the initial level the n you will have reason to enter your trade with a favorable risk to ratio situation.
Make Very Good Use Of Moving Averages
You can’t do without those moving averages. They are absolutely indispensable. Keep your eye on moving averages of the 50, 100, and 200 variety. Some even suggest the 500 moving average.
Why these averages?They are the most popular and psychologically influential among the big financial institutions. Although there are multiple variations of these moving averages, I suggest you stick with the Simple Moving Average(SMA). It’s straightforward and less stressful.
An Illustration Of Forex Trading Position Trading Strategy
Let’s take a look at another illustration of position trading in its full pump using the Russian annexation of the Crimea
Now in case you some of you have forgotten Russia illegally captured the Crimean peninsula from Ukraine. This caused the European Union to hit Russia with hefty sanctions in 2014, the likes of which it had never experienced. Or course the Russian ruble went into a tailspin as a result of those sanctions.
Let’s see how these sanctions affected the price action.
Ladies and gentlemen, here is how the sanctions affected the Ruble. The Ruble takes a huge 50% plunge against the ruble.
If you are a trader you will be salivating at such a long term opportunity. How will you have taken advantage of such a sumptuous opportunity? Let’s take a look at the price action in the next chart
As a consequence of the EU sanctions on Russia the EUR/RUBLE pair break through the 51.00 resistance level. This heralds the last big surge from mid MArch 2014 when the Russians charged into the Crimean Peninsula. And it happens right after the price action has soared above the the 100, 200, and 500 Simple Moving Averages.
After the 51.00 breakout event, forges a top at the 55.0 area(as indicated by the blue horizontal line). See how price does a U-Turn to touch the previously broken 51.00 area to re-test its resolve. A huge ricochet takes place causing a breach of the blue horizontal line.
Now if you are long term trader you will be besides yourself with excitement. You should be saying “Hmmm….This definitely a bullish trade that I can make a truckload of cash from. The price confirmation signal for this trade is too loud to ignore.”
So, what do you do? You buy the EUR/RUBLE pair at 56.00 Rubles to the dollar, assuming the ruble tumbles further. You then place your stop order on the swing bottom indicated on the chart
Now notice how the price action touches the ruble touches the area at 97.00 rubles. This by the qway is 40 rubles more than your entry price. The candle in this area represents a price bubble triggered by high price volatility. This candle closes at a low, creating a huge upper candlewick. And if you don’t know by now the bulls dominance is coming to an end.
In view of this high turbulence you may want to exit with part of your profits. You ‘re probably thinking” Wait a minute! The Russian economic and political problems don’t show any sign of ending anytime soon.”
In that case wait for a complete breakout through the orange bullish trend. As you can see the bears have take over, creating a bottom at the 71.00 level. In that case exit your trade once price breaks at that level.
Lastly see how price breaks at the 100 SMA period. You could have closed your trade prior to this event. It’s alright. You can still close out the remainder of your remaining trading positions. This is very exciting stuff. Isn’t it?
That’s a wrap for “ How To Profit From Position Trading In The Long Term” Like I said you don’t need to stay at your screen all day scouring for trades. Just pick 1 or two trades and watch them play them selves out any where fro two weeks to a year – depending on the time chart that you choose. Of course you will have to do consider fundamental factors backed by price action analysis while you work out your strategy.
Till next time take care.
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