The Investment Horizon
A mid- to long-term strategy, position trading is focused on fundamentals, because these are the factors that really move the market. Technical analysis should indeed be utilized in this strategy too. The technical methods in this case are used for better timing of the entry into and exit from a position. The latter are determined from charts of a longer time frame, mostly weekly and monthly, as they offer a more comprehensive view of the market.
Position trades have more of an investment outlook, so they usually remain open for months or even for years. This is why minor market fluctuations are simply ignored, as they do not change the broader market outlook. Clearly understanding how economic factors affect financial markets is key to the ultimate success of this strategy.
Advantages and Disadvantages Of the Strategy
Position trading comes with certain advantages and disadvantages, and this directly stems from the comparatively long period of time during which positions remain open. To begin with the pros, it requires minimum time investment to keep track of the open trades. The reason is the fact that short-term fluctuations are simply ignored, since they do not alter the broader picture. Another advantage is the low risk-to-reward ratio. The expected large returns for the assumed risk stems from an investor potentially having his position open through a good portion of a long-term market trend; and the bigger the move, the bigger the positive result in an individual’s trading account.
The major short-fall of the strategy is that it provides very few trading opportunities due to its much longer investment horizon. Another con is that in order to be successful, one needs to have a really good understanding of both fundamental and technical analysis, which requires huge time investment and dedication at an earlier stage.
How Position Trading Can Be Put Into Action
Let us now have a look at a real market example to get a better picture of how position trading actually works.
The German DAX30 chart above pictures the formation of a well-known pattern in technical analysis, namely, the head and shoulders. It took about two years for this reversal pattern to materialize. The confirmation for entering into a short position came with the penetration of the neckline subsequent to the right-hand shoulder on 8 October 2018. To clarify further, the neckline is the horizontal blue line, corresponding to a level of €11,692.
The sell-off that followed the breakout was rather justified from a fundamental perspective too. The US-China trade war gaining steam toward the end of 2018 gave a heavy blow to the automotive industry. This hurted the German economy, which consequently went through a technical recession. The Brexit drama playing out at the same moment aggravated the situation further, since the prospect of the UK leaving the EU without a deal, the so-called “hard Brexit”, was promising to have a negative impact on the German economy too.
You can clearly see how the combination of fundamental and technical factors created the perfect storm needed for the massive sell-off of the DAX30. An investor’s ability to combine fundamental and technical analysis, therefore, is absolutely crucial for structuring a solid trade idea. For this reason, in most cases you will be better off being properly advised by a professional trader, rather than risking your capital alone.