How long should you hold a position trade?
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A position trade is normally held for an extended period, from several weeks to many months. In extreme cases, a trader can hold a position for years, especially if market conditions remain supportive of their original thesis.
When traders enter a position trade, one mainly focuses on wider market trends instead of short-term price movements. The trader filters out a lot of the day-to-day market noise in favour of larger economic, industry, or corporate developments that may influence prices in the long run.
Typical duration of a position trade
First and foremost, the duration of a position trade isn’t dictated by a predetermined timeframe. It has to be set by the validity of the trader’s original analysis. Put simply, if a trader enters a position, the position may remain open as long as that forecasted trend continues, whereas if the market conditions change and invalidate the rationale, it’s expected that the trader should assess the position regardless how long it has been held.
In some cases, position trades only last a few weeks because the market reaches the trader’s planned exit level quickly. That’s why effective position trading requires a regular evaluation of market conditions and disciplined risk management.
What are the common buy-and-hold strategies?
Position trading and investing aren’t the same concepts, though they share similar features and characteristics, chief among them their participation in long-term market trends. If you have been a long-term market participant, you might have used one or several of the following buy-and-hold strategies:
- Trend following: This approach aims to identify sustained upward or downward price movements and remaining in the position while the trend is being observed. Rather than predicting turning points, trend followers enter an established trend and exit when evidence suggests that the trend is weakening.
- Diversified portfolio: In this practice, long-term investors often spread their investments across multiple sectors or asset classes to avoid risks coming from putting all their investments in one basket. Diversification is a widely accepted risk management technique that helps reduce the impact of poor performance in just one market segment.
- Regular investing: With this approach, investors use a systematic way of investing at regular intervals irrespective of market conditions. Investing over the long term can be beneficial as part of one’s broader wealth-building strategy.
- Growth investing: This practice involves identifying companies or sectors with particularly strong growth prospects and maintaining exposure while the underlying fundamentals remain supportive. This approach takes time, research and analytical skills because of the ongoing monitoring of market conditions, which can evolve or change over time.
How different is position trading from other trading styles?
Position trading differs from other trading styles primarily in terms of holding period and market focus:
- Scalping: Throughout the trading session, scalpers hold their positions for only seconds or minutes. The aim is to generate profits from small price movements in that short period.
- Day Trading: Day traders open and close positions within the same trading day. They do this to avoid overnight market exposure.
- Swing Trading: Swing traders enjoy the best of both worlds by holding trades for several days or weeks in an attempt to capture medium-term price swings.
Each approach requires different levels of commitment and market analysis, with no single style being inherently better than another.
Why hold trades for longer?
Position trading offers several potential advantages in comparison to its shorter-term counterparts:
- Less stress from short-term market noise
- Fewer trades to manage
- Lower transaction frequency
It’s expected for financial markets to experience frequent short-term fluctuations that may have little relevance to longer-term trends. Because of this, position traders can direct their attention to broader developments than having to react to every price movement that happens every day, or several times in a day.
Because trades are placed and held for longer periods, this practice generally results in fewer entries and exits. There are fewer trading decisions involved which can help traders maintain a more structured approach.
Long-term investment approaches are often cited as benefiting from lower turnover and reduced trading activity. Because position traders generally trade less often, transaction costs associated with frequent entries and exits may be reduced.
Tips for holding position trades
Holding positions for extended periods can be challenging. While there’s no guaranteed way to maximise returns, several practices may help traders remain focussed and disciplined:
- Develop a clear trade thesis: Before entering a position, it is important to define the reasons for taking that trade. A written trade thesis can provide a useful reference point when market volatility creates uncertainty. If the factors supporting the trade remain intact, short-term fluctuations may be easier to manage.
- Define your risk before entering: Long-term trades should include predefined risk parameters. Many traders establish exit levels before entering a position so that decisions are based on planning rather than emotion.
- Know the impact of costs: For CFD traders, longer holding periods may result in overnight financing charges and other trading costs. These costs should be considered when evaluating the viability of long-term positions.
- No need for consistent monitoring: One of the challenges of position trading is the temptation to react to every short-term market movement. Excessive monitoring can lead to emotional decision-making and unnecessary adjustments.
- Review the trade periodically: Holding a position for a long time does not mean completely ignoring it. Regular reviews allow traders to determine whether the original thesis remains valid and whether any significant developments have altered the market outlook.
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Frequently asked questions (FAQs)
Position trading seeks to profit from medium- to long-term price movements and often uses trading products such as CFDs, bearing in mind that CFD traders don’t own the underlying asset. On the other hand, investing typically involves purchasing and owning the underlying asset directly for long-term wealth accumulation.
Position trading may appeal to traders who prefer analysing longer-term trends rather than monitoring markets continuously. However, all forms of trading involve risk, and traders should ensure they understand the products and markets they are trading.
CFD positions can be held for extended periods, provided account requirements are met. Traders should be aware though that overnight financing and other costs may apply when positions remain open for longer periods.
