Planning and risk management
Position and swing trading
Position trading involves holding positions for weeks, months or even years with the expectation they will become profitable in the long term.
Investing is the most recognised and traditional form of position trading, with a great many people holding long-term investments in share portfolios, funds or pension plans. However, 'investing' exclusively refers to going long, while position trading can include going short as well.
Before entering a trade, a position trader will often spend a considerable amount of time studying the fundamentals of the asset they're going to be trading.
For example, when buying shares, you'd usually look at the company's financial reports, and in particular the financial statements, to see if it's making profit or has an edge over its competition. Similarly, if you were position trading on forex, you'd probably examine the economic health and monetary policies of the relevant countries before placing a long-term currency trade.
Because of the long-term nature of these transactions, position traders tend to risk a lot more per trade than other types of trader – though with the expectation of making greater profits. Which means to be successful you need to have patience, and not get spooked by short-term market moves.
If you decide to follow a position-trading approach, there are a few things you need to be mentally prepared for.
When holding a trade for a long time, it's almost inevitable that the market will move in an unfavourable direction at some point. In these circumstances you need to have the resolve and conviction to follow the rules set out in your trading plan, waiting for the market to turn back in your favour if required.
But imagine if you were then to read comments in the press suggesting the market could move even further against you? Would you be able to hold your nerve?
What's more, if trading using leverage, you need to make sure you have enough starting capital to weather any large unfavourable price swings. As trades are made over such a long timeframe, the market could easily trend against you for several days or weeks, even if it does end up reversing eventually. These moves could force you to close your position early if you don't have enough capital in reserve.
IncorrectPosition traders usually hold trades for much longer than one day.
IncorrectPosition traders regularly use fundamental analysis to trade.
Swing trading involves holding positions over several days or weeks, in an attempt to take advantage of medium-term market moves. It's the ideal style for people who want to trade fairly frequently but don't have time to spend all day monitoring the markets.
In fact, it's entirely possible to have a full-time job while swing trading in the evenings or early mornings, although you must be careful to set stops and limits for each trade.
Swing traders will regularly hold positions overnight, where large movements and market 'gaps' can occur. Due to the length of time trades are held for, the market will often move in an unfavourable direction at some point, therefore a certain amount of patience and nerve is required – though not as much as for position trading since the timeframe per trade is shorter.
Both fundamental and technical analysis (the study of market movements using charts) are commonly used for swing trading, with technical analysis particularly useful for establishing stop and limit levels.
IncorrectSwing traders often only check the market a few times per day.
IncorrectThe medium-term movement of a market is important to swing traders, not how it behaves immediately.
IncorrectSwing traders generally like to take their time, placing only a few trades per day/week.
Did you know?
- Position trading involves holding positions for weeks, months or even years with the expectation they will become profitable in the long term
- Swing trading involves holding positions over several days or weeks, in an attempt to take advantage of medium-term market moves
- Market gaps occur when the price of an asset makes a sharp jump from one level to another without any trading in between
What is a trading plan?7 min
How to make a trading plan10 min
What is risk management?6 min
Ways to manage risk: part one7 min
Ways to manage risk: part two7 min
Choosing your trading style3 min
Position and swing trading10 min
Day trading and scalping10 min