Position trading refers to a trading style that involves taking a position and holding it for a relatively long period of time. In Forex, taking a position means buying or selling a currency pair. For example, if you believe that the Euro is likely to appreciate against the dollar, then you can buy EUR/USD.
You may ask how long a position should last to name it position trading. There are different views, but generally, position trading is about positions that last for weeks, months, or even years. It is often said that if you open a position and hold it for more than a day then it is position trading.
Another view says that if you open a position based on some fundamental reasons and hold it as long as those fundamentals are unchanged, you are a position trader. For example, consider a country of which you think that its central bank would continue to raise the interest rate because of rising inflation. If you buy its currency and hold it as long as inflation is rising, you can name it position trading. The point is that fundamental reasons rarely change overnight, so it is a long term position.
Since the "long term" horizon is the core of position trading, personality and risk tolerance of traders could affect their performance significantly. In position trading, it is very usual for a position to be in loss for days or even weeks and you should be able to be patient and give enough time to your decision to work. It certainly doesn’t mean that you have to stay in loss for ever but you also need to be able to make this difficult decision to close a position as soon as the fundamentals start to deviate from assumptions that the position is based on.
Another difference is the size of positions. Generally, the size of a position is smaller in position trading than day trading. The reason seems obvious, as in position trading your position should withstand daily fluctuations in the exchange rates until the fundamentals, which the position is based on, start to be reflected in prices. It means that the position should be less leveraged. To find out why leverage is so important, note that in the Forex market, it is not unusual for a currency pair to rise or fall as much as 3 percent in a single day while the final appreciation or depreciation of currencies is often limited to 10 percent over a year. The 3 percent in this example would wipe out any position with more than 1:30 leverage.
The number of trades is also different for these two trading styles. As you saw, in position trading you need more margin to give your position enough time. It means that the number of trades is often limited. While critics say that holding a long term position could result in losing opportunities that arise daily in the Forex market, some traders believe that having less trades could reduce the number of losses which may help to be more confident.
However it is not always that easy to come to long term decisions and therefore most long term decisions need considerable time for analyzing fundamental economic data. They often require in-depth knowledge and understanding regarding macro-economics and related issues. In fact, monitoring a long term position could be easy but finding an idea that works in the long run is something different.
Market Trend: The first step in position trading is to identify the market trend. It is certainly the most difficult step. Reading Forex market news and analysis for a relatively long period of time could give a picture of where the current situation is headed. It is worth noting that to have a long term perspective, fundamental analysis is not the only tool but technical analysis could also be used especially for evaluating fundamental assumptions. It is also possible for a currency pair - or even the whole market - to be trendless for a period of time. It means that the underlying forces are mostly balanced, which could make it impossible to bet on a long term direction.
Market Volatility: A measure of risk is another thing you need for assessing the consequences of your decisions. Volatility is a common tool since it shows the probability of price deviation from what you want to see. Volatility usually reflects the level of uncertainty, so it makes sense to avoid highly volatile markets or currency pairs when looking for a long term position. Forex trading terminals usually have some technical indicators to show the volatility. Volatility indexes may also appear in daily Forex market news.
Size Management: If your position is in profit, you may decide to add to it, usually upon a market correction, to benefit more from a correct decision. However, be cautious that adding to a position is similar to opening a new one and it means that you need to evaluate the situation again.
Brokers: As it was mentioned, sizes tend to be smaller in position trading than for other trading styles such as day trading. So if the capital is limited you may need a broker that offers mini accounts which lets you to trade with mini lots. A mini lot is generally 10,000 units of a currency which is usually equal to 0.1 of a standard lot.