A Beginners Guide for Position Traders: What Is Position Trading?

CFD position trading involves acquiring a financial asset with the intention of holding it for an extended period, anticipating its appreciation over time. Unlike day traders who focus on short-term price fluctuations, CFD position traders are less swayed by daily news events unless they significantly alter their longer-term perspective on the asset.

In essence, CFD position traders adopt a trend-following strategy, identifying longer-term patterns in the market and selecting CFDs on assets they believe are poised to benefit from these trends, and then holding onto them until the trend reaches its peak.

CFD position traders typically make many fewer trades when compared to those with different trading philosophies. Successful CFD position traders meticulously plan their entry and exit points in advance and employ risk management techniques such as stop-loss orders to mitigate potential losses. It's important to distinguish CFD position traders from buy-and-hold investors, as the former actively identify and capitalise on trends in the market, aiming to maximise gains from upward price movements, while the latter passively focus on long-term asset accumulation for objectives like retirement.

Position Trading Markets

CFD position trading finds its prime candidates across various markets, offering ample opportunities for traders.

In the realm of share CFDs, position traders tend to gravitate towards contracts on growth stocks, which are generally those of companies poised for substantial revenue and metric growth. These often include tech startups or firms with significant competitive advantages. Conversely, value stocks, trading below their intrinsic worth, attract position traders eyeing potential market corrections. Additionally, dividend stocks, known for stable revenues and profit sharing, offer compounding returns when dividends are reinvested, enhancing position trading portfolios.

Commodities CFDs present another opportunity for position trading, spanning energies, metals, and agricultural products. Influenced by supply-demand dynamics and catalytic events like weather changes, commodities frequently spawn long-term price trends, inviting position traders to leverage market shifts.
Index CFDs, representing diversified baskets of stocks, emerge as ideal instruments for expressing broader market sentiments over medium to long terms. Positioned as proxies for market trends, indices afford position traders strategic opportunities to potentially capitalise on overarching bullish or bearish market movements.

Position Trading Example

Let’s take a look at a hypothetical scenario where a position trader engages in CFD trading using an index CFD:

John, an experienced position trader, closely monitors the financial markets and identifies a long-term bullish trend in the technology sector. He believes that the S&P 500 index will continue to rise over the coming months due to strong earnings reports and positive industry developments.

John decides to enter a long position on the S&P 500 index CFD, speculating on its upward trajectory. He carefully selects his entry point based on technical analysis and market sentiment indicators, choosing to buy the index CFD at $4,000 per contract.

Over the next few weeks, John's prediction proves correct as the S&P 500 index steadily climbs higher, driven by the tech sector's strength. As the index reaches $4,200 per contract, John decides to take partial profits, selling half of his position to lock in gains.

Despite minor fluctuations, the bullish trend persists, and John holds onto the remaining half of his position, confident in the continued upward momentum. As the months pass, the S&P 500 index surpasses $4,500 per contract, validating John's initial analysis and delivering substantial profits on his remaining position.

Eventually, John decides to close his position entirely, selling the remaining contracts at $4,600 each and realising gains from his successful position trade on the S&P 500 index CFD.

This illustrative example highlights how a position trader may potentially capitalise on long-term market trends using CFDs, employing careful analysis and strategic decision-making to profit over time. However, it is important to remember that if the market does not move in John’s favour, significant losses may be incurred. For example, John enters a long position on the S&P 500 index CFD at $4,000 per contract. John's prediction proves incorrect as the S&P 500 index steadily loses value, driven by the tech sector's weakness. As the index reaches $3,800 per contract, John decides to realise his losses, and closes his position to limit and control his losses.

How Does Position Trading Work?

Let’s delve deeper into some of the key mechanisms by which CFD position trading operates:

Contract Dynamics: CFD position trading revolves around contracts that mirror the price movements of underlying assets. These contracts specify essential details such as the asset being traded, contract size, and margin requirements. Traders enter into agreements with CFD providers to speculate on whether the asset's price will rise (going long) or fall (going short).

Long and Short Positions: Traders can take long positions, anticipating asset price increases, or short positions, expecting price decreases. Going long involves buying a contract, aiming to sell it later at a higher price for profit. Conversely, going short entails selling a contract with the intent to repurchase it at a lower price, profiting from the price drop.

Margin Trading: CFDs enable traders to leverage their positions, amplifying potential profits or losses. This is achieved through margin trading, where traders only need to deposit a fraction of the contract's total value, known as margin. While leverage magnifies gains, it also increases risk, as losses can exceed the initial margin deposit.

Opening and Closing Trades: To initiate a position, traders specify the quantity and direction (long or short) with their CFD provider. The profit or loss on a position is determined by the difference between the entry and exit prices. Traders can close positions at any time, either to lock in profits or limit losses.

Risk Management Tools: Effective risk management is critical in CFD position trading. Traders use various tools like stop-loss orders to automatically close positions if prices move unfavourably beyond a certain level. Take-profit orders are also employed to secure profits at predetermined levels.

Overnight Funding Fee: Holding CFD positions overnight may incur financing costs. The Overnight funding fee is either added or subtracted from the trader’s account. The overnight funding fee is mainly determined by factors like interest rates and the notional value of the position.

Market Access and Liquidity: CFDs offer access to a wide range of markets, including stocks, commodities, indices, and currencies. This diversity allows traders to diversify their portfolios on various markets. However, liquidity varies across different CFD instruments, influencing trade execution.

Continuous Monitoring: CFD position traders continuously monitor market developments and adjust their positions accordingly. They stay informed about economic indicators, market news and events, and technical analysis to make informed trading decisions.

By understanding these fundamental principles, traders can navigate the intricacies of CFD position trading effectively, in an effort to maximising opportunities while managing risks inherent in leveraged trading instruments.

Position Trading vs Day Trading

CFD position trading, CFD day trading, and CFD swing trading are three distinct approaches to the world of trading, and each has its own characteristics and considerations.

CFD position trading involves taking a longer-term view of the market, with trades held for weeks and/or months. Traders identify trends and seek to capitalise on sustained market movements. They typically make fewer trades, focusing on capturing the bulk of a trend's upward movement. Position traders employ meticulous planning for entry and exit points, often utilising risk management tools like stop-loss orders to protect against potential losses.

In contrast, CFD day trading involves executing multiple trades within a single trading day, speculating on short-term price fluctuations. Day traders aim to get advantage of intraday market movements, often closing out all positions by the end of the trading day to avoid overnight exposure to market risk. Day trading requires quick decision-making, technical analysis skills, and a disciplined approach to risk management.

Position Trading vs Swing Trading

CFD swing trading falls between position trading and day trading, with trades typically held for days to weeks. Swing traders aim to capture shorter-term price movements within the context of longer-term trends. They employ technical analysis to identify entry and exit points, seeking opportunities where the potential for profit outweighs the risk. Swing trading requires patience and discipline to wait for opportune moments to enter and exit trades.

Each approach has its pros and cons. Position trading offers potential for capturing longer term price movements but requires patience and tolerance for market fluctuations. Day trading aims at capturing quick market movements but requires constant monitoring and may incur higher trading fees. Traders should carefully assess their trading goals, risk tolerance, and time commitment before choosing a CFD trading strategy.

Position Trading Strategies

Position trading offers various strategies for traders to capture market trends and movements over extended periods. Among the best position trading strategies are trend trading, breakout trading, and pullback trading.

Trend trading serves as the cornerstone of position trading strategies. Position traders typically adhere to the belief that once a trend is established, it is likely to persist until a shift in market sentiment occurs. In trend trading, traders seek to identify entry points early in a trend and exit positions after achieving a predetermined level of profit. Fundamental factors play a significant role in trend trading strategies, although indicators such as moving averages and the relative strength index (RSI) assist in identifying the onset and conclusion of trends through momentum, volume, and price action analysis.

Breakout trading represents another prominent approach for position traders. This strategy involves identifying key levels of support or resistance within a market and evaluating whether there is sufficient momentum to breach these levels. Upon breaking through support or resistance levels, the prevailing trend is anticipated to continue before potentially reversing. Common tools for breakout trading include trend line tools, momentum indicators, and volume indicators such as Fibonacci retracements, the Ichimoku cloud, and the Moving Average Convergence Divergence (MACD).

Pullback trading, also known as retracement trading, focuses on smaller market movements that temporarily counter the prevailing trend. Position traders view pullbacks as periods of consolidation before the resumption of the trend. While existing trades may overlook these movements, pullbacks offer valuable entry points for new positions. Traders often employ Fibonacci retracements to identify pullbacks and distinguish them from potential reversals.

In summary, position trading encompasses diverse strategies tailored to capturing sustained market movements. By understanding and effectively implementing trend trading, breakout trading, and pullback trading strategies, position traders may be better placed to navigate the markets with precision, but as with all arenas of CFD trading, the potential for capital loss is ever-present and profits are never guaranteed.

Benefits & Risks of Position Trading

CFD positions trading offers many attractive features as well as drawbacks which a novice trader would be well advised to consider. Let’s take a closer look:

Advantages

Time Flexibility: CFD position trading allows traders greater flexibility in managing their trades, and accommodating busy schedules or other commitments.

Lower Transaction Costs: Fewer CFD trades result in reduced transaction costs for traders over time.

Ability to Ride Out Fluctuations: CFD position traders can withstand market fluctuations, capitalise on longer-term trends.

Drawbacks

Limited Opportunities: CFD position traders may encounter fewer trading opportunities due to their focus on longer-term trends rather than short-term fluctuations.

Difficulty in Predicting Long-Term Trends: Forecasting long-term market trends accurately poses challenges and increased uncertainty for CFD position traders.

Slower Returns: CFD position trading typically yields slower returns compared to other strategies, frustrating traders seeking quicker profits.

Higher Transaction Costs: Holding CFD positions for extended periods can result in higher transaction costs, impacting overall profitability.

Increased Risk of Market Events: CFD position traders are more susceptible to market events and news, exposing them to unexpected and potentially larger losses and heightened risk.

Conclusion

In conclusion, CFD position trading offers traders a strategic approach to potentially capture longer-term market trends, providing both opportunities and challenges. By adopting a trend-following strategy and meticulously planning entry and exit points, position traders aim to maximise profits over extended periods. However, this approach also comes with limitations, including fewer trading opportunities, challenges in predicting longer-term trends accurately, slower returns, higher transaction costs, and increased exposure to market events posing a risk for potentially larger losses. Understanding the benefits and risks of CFD position trading is essential for traders to make informed decisions and effectively navigate the complexities of the financial markets. With careful consideration and diligent risk management, position trading may be a rewarding strategy for achieving trading goals.

FAQs

What is a position trader?

A position trader in CFD trading is a trader who holds CFD contracts for an extended period, aiming to capture longer-term market trends.

Is position trading good for beginners?

Before engaging with Position trading, the beginning trader must first familiarise himself with market dynamics and the attendant risks.

What is an example of a position trade?

An example of a position trade in CFD trading could be buying a CFD contract for shares of a stable company with growth potential and holding it for several weeks or months.

Which instruments can I position trade on?

You can position trade on various instruments such as stocks, commodities, indices, and currencies through CFDs (Contracts for Difference).

What markets are appropriate for position trading?

You can position trade CFDs in a wide range of markets, including stocks, commodities, indices, currencies, and cryptocurrencies.

What are the most popular position trading strategies?

Some popular trading strategies in CFD position trading include trend trading, breakout trading, and pullback trading, which aim to capitalise on sustained market movements over time.