Forex Position Trading Strategy Guide and Examples

Forex position trading is like the marathon of FX trading that seeks to identify and capitalize on longer-term trends that can last over several months to years, rather than getting caught up in day-to-day price fluctuations.

In many ways, position trading resembles traditional investing, but with a twist. Unlike other markets, where investing usually involves holding long positions, position trading Forex allows you to exploit both rising and falling markets.

But here's the catch: unlike shorter-term trading styles, position trading demands exceptional patience and a thorough understanding of the fundamentals of the currency market.

It is crucial to grasp how economic data, fundamental market themes, and geopolitics affects countries and their future prospects, as these factors determine the long-term trends of currency pairs.

Now let’s talk about the risks of positional trading.

Given the prolonged holding period with position trades, you must prepare for significant up-and-down swings in the price which means that your stop losses will need to be set with a wider margin.

But here's the thing – while your losses can potentially be substantial, those losses can be offset by significant profits. However, to handle the risks effectively, you must ensure you have sufficient capital in your trading account, handle leverage responsibly, and have a sound risk management strategy in place.

This is critical because it's almost certain that at some point, your position trades will experience significant retracements or pullbacks that can test your nerves. During these challenging times, it is essential to remain calm, stay patient, and be confident that the Forex position trading strategy will work over time.

Now that you know what position trading is in Forex, in this guide, we'll break down the strategies, provide practical examples, and guide you through the process step by step.

 

What is a Position trader?

Are you wondering if position trading is the right fit for you?

Let's explore some key characteristics and see if they resonate with your trading style and personality. The more you identify with these traits, the higher the likelihood that position trading might be the perfect trading strategy for you:

• You have a 9 to 5 job so you don’t have the luxury of monitoring the markets all day long

• Ability to think independently

• Have a bigger trading account

• Like fundamental analysis and technical analysis

• You are a slow thinker

• Have patience and can be calm when the market moves against your Forex position

 

What Is an Example of Position Trading?

To better understand the long-term position trading Forex let's dive into an example that showcases how this strategy plays out in the Forex market. Imagine a scenario where the Federal Reserve (Fed) has just concluded its interest rate meeting, during which it announced its intention to raise interest rates over the next few months.

In theory, when interest rates increase, the US dollar tends to strengthen because investors flock to dollar-denominated investments, aiming to capitalize on the rising interest rates. This phenomenon is commonly known as the carry trade strategy.

This means you would buy the USD against other currencies, such as EUR, GBP, or JPY. Your plan is to hold onto these positions for an extended period, aligning with your position trading approach.

Source: TradingView EURUSD Weekly Chart

Position traders won't be swayed by the immediate market reaction to the Fed interest rate announcement but they’ll keep focusing on the long-term trend and the underlying fundamental factors. The decision to exit the trade will be based on news that alters the outlook. For instance, if the Fed unexpectedly starts cutting rates, indicating a shift in their stance, you may consider closing your position.

By comparing day trading vs position trading, day traders would aim to capitalize on the immediate market reaction following the interest rate meeting, holding trades for just a few hours until the market settles.

What Is a Good Strategy for Position Trading?

To excel as a beginner position trader, it's essential to employ a well-rounded strategy that employs a combination of fundamental analysis and technical analysis to evaluate potential market trends:

Top position trading strategies include:

1. Trend trading strategies

2. Pullback trading strategies

3. Breakout trading strategies

Trend Trading Strategy

Position traders are avid trend followers, as they believe that once a trend begins, it is more likely to continue than reverse, which is why every position trading Forex strategy is essentially a trend trading strategy at its core.

A simple yet powerful approach involves using the 50-day moving average (MA) and 200-day moving average (MA) indicators.

With this trading strategy Forex positions are opened when:

• Sell Signal: When the 50-day MA crosses below the 200-day MA, it is referred to as the "Death Cross," signaling a potential downtrend.

• Buy Signal: When the 50-day MA crosses above the 200-day MA, it is known as the "Golden Cross," indicating a possible uptrend.

Source: TradingView GBPUSD Daily Chart

Pullback position trading strategy

Typically, pullbacks are seen as brief pauses for the market that occur in the opposite direction of the prevailing trend before the primary trend resumes.

One common method of identifying pullbacks, while ensuring they are not complete reversals, is by using Fibonacci retracements. These retracement levels help identify potential areas where the market is likely to bounce back in the direction of the prevailing trend and you can open a trading position.

 

Source: TradingView USDJPY Weekly Chart

Breakout trading strategy

Breakout trading entails identifying key support or resistance levels in the market and assessing whether there is sufficient momentum to break through those levels. As a general rule the more a SR level is tested the weaker it becomes.

By identifying these price points, position traders can initiate trades at the early stages of significant price movements. Common technical indicators used with this system are momentum oscillators like MACD, RSI, and Stochastic.

Source: TradingView USDCAD Daily Chart

Since position trading involves holding positions overnight, subject to rollover interest charges, finding a Forex broker with competitive fees is crucial. Research and compare the best Forex brokers, considering fee structures and rollover rates HERE.