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any traders are interested in trading currencies and opt for day trading because it enables them to make the biggest profits. However, it is rather the long-term forex traders, also known as position traders, who are among the more successful traders in practice.
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This article deals with position trading strategies, highlights the best practical tips and explains important framework conditions.
What is “position trading”?
Put simply: long-term trading
The idea behind this approach is to conduct only a few trades but to generate larger individual profits. So while position traders usually aim to earn at least 200 pips per position, their opportunities are much more limited than day trading. As a result, traders following this strategy need a lot of preparation and good basic knowledge.
Long-term strategies for Forex and CFD trading
Position trading shows how to trade on the Forex market over the long term. The aim is to identify a trend and then follow it for a more extended period (days, weeks and months). In some cases, some traders follow the trend for several years.
For example, speculators like George Soros shorted the British pound heavily in 1992. They were sceptical as to whether the United Kingdom could maintain the fixed exchange rates at that time. The country withdrew the pound from the ERM (European Exchange Rate Mechanism) on 22 September 1992 and Soros made more than a billion pounds with its trades.
An example of a position trading strategy
Now that you have received some general information about position trading, the following section will discuss a concrete strategy for long-term Forex trading.
Suppose you are a Forex & CFD trader from the U.S. and there have been some political events that are likely to impact the USD. With the information you have at your disposal, you should now analyze in which direction the USD is likely to move.
If you believe that there is a good chance that the currency pair will move in the direction you expect it to, then it would be wise to open a position.
Position traders should always take geopolitical factors into account, i.e. always keep an eye on current developments in both countries or currency areas. For example, if you are trading EUR/USD, follow the news from the U.S. and the eurozone carefully.
How does forex and CFD position trading work?
There are several ways how you can improve your position trading.
An important tip for beginners: Do not let your emotions influence your trade. This could seriously damage your performance. Closing a position early and losing potential profits can be a psychological challenge. But this is what is sometimes necessary – and exactly when the trade develops differently than you expected.
A golden rule: No matter what happens, stick to your strategy!
Each time you want to open a position, you first estimate in which direction the price could move and how large the price movement could be. You must also ensure that each trade has both a Take Profit and a Stop Loss. Stops are sensible strategies to limit possible losses.
You should always observe the following risk limitation principles – regardless of whether you want to start with position trading or day trading.
The best practical tips for long-term trading
While every trader has a different approach to trading, there are some general guidelines that apply to most position traders. These guidelines are primarily based on risk management and the “laws” of the foreign exchange market.
Here you will find some help on how to become a better position trader.
- Do not trade too large positions
As a position trader, you should not trade too large volume in relation to your account size so that there is always sufficient margin available on your trading account. One of your most important considerations for long term forex trading is to ensure that you can easily withstand any common intraday or even intra-week fluctuations.
Since a currency pair can fluctuate a few hundred pips in a day, you should make sure that these “normal” price fluctuations do not trigger a stop loss.
- pay attention to the SWAPs
Pay attention to the swaps, i.e. the fee/financing costs for a position overnight. Swaps can sometimes be positive. But in many cases they are negative, so you take these costs into account when making your calculations.
In some cases, you can use a trading strategy where the pip profit is relatively small, but the SWAP remains moderate.
- Expense vs benefit
Remember that even with the best strategy, you cannot always achieve your profit goal. This could easily happen if you use a lever that is too low. If you only trade a small amount of capital, you should always make sure that the ratios are right – the risk should always be appropriate for the profit potential. For this reason, you need to consider the time spent on trading compared to the expected profits.
In most cases, you should use comparatively large amounts of capital to get a reasonable risk to reward ratio. As a suitable way to get a better feel for this risk-reward ratio, we recommend that you first use a free of charge but above all risk-free demo account!
Steff has been actively researching the financial services, trading and Forex industries for several years.
While putting numerous brokers and providers to the test, he understood that the markets and offers can be very different, complex and often confusing. This lead him to do exhaustive research and provide the best information for the average Joe trader.