At its core, position trading is the closest forex traders can get to ‘buy and hold’ investing.
A position trader executes orders in the markets and holds them for several months or years based on long-term trends with little worry on short-term pullbacks. One of the main benefits of this trading philosophy is the minimum time required.
Once the technical and fundamental analysis has been performed behind the scenes, a position trader doesn’t need to actively monitor their positions for days or weeks unless something significant occurs, altering their bias.
Position trading requires the study of primarily weekly, monthly, and, to some extent, daily charts. A typical position trader won’t execute more than ten orders in a year.
This methodology’s success requires substantial capital for earning decent gains and incredible patience considering the significantly long hold times.
Another benefit of position trading is traders can trade most currencies with little concern over spreads. Position traders thrive off extended trends or ‘big moves.’
More technically, position traders need instruments with the highest volatility and low swap fees. The latter aspect is worth considering as they don’t want these costs to accumulate too much considering the length of their holding times.
How to pick the best currencies for position trading
Position traders can take advantage of all the major and minor pairs and most of the exotics. Generally, a trader employing this approach has the best chance of sticking with the former two and perhaps the latter if it can provide a favorable carry trade.
Several exotic pairs have positive-bearing interest rates when paired against most major and minor markets because of the economic disparities within their respective nations.
As previously mentioned, position traders need currencies with the highest volatility and the lowest swap rates.
- Volatility: This refers to the measure at which prices change within a given
period, measured in pips across different time frames. What’s important is, of course, how high this measure is generally.
Usually, most currencies paired with the British pound are the most volatile, e.g., GBPCHF, GBPJPY, GBPUSD. Below is a table of the current average volatility percentages across the nine main time frames for various forex pairs.
We can see the monthly average volatility of the euro, the most traded pair globally, is 1.46%, while it is 6.02% for GBPJPY and 2.98% for GBPUSD.
The main point is trading the most volatile currencies offers position traders the best opportunity for maximum gains as each pip covers a greater distance over a shorter period.
On the flip side, you will need larger stop losses to withstand when markets go against you since volatility does work both ways.
- Swap rates: A position trader’s worst nightmare is holding onto positions
that debit their account due to negative swaps. Therefore, you’ll want to choose pairs with low swaps.
These usually exist with major and minor markets as the interest rates of their respective nations are relatively the same. Position traders are more prone to negative swaps with exotic pairs where the rate differentials are notable.
These include most ZAR (South African rand), TRY (Turkish lira) pairs, and a few others. Conversely, a position trader may find some incentive when trading in a specific direction, assuming the trade idea makes natural fundamental or technical sense.
For instance, selling USDZAR produces a positive swap since South Africa’s interest rates have historically and continue to be higher than the United States. So, it’s not to avoid exotic pairs altogether but to understand which direction is more favorable.
Moreover, a position trader should expect even rarer opportunities with these markets than with majors and minors.
Best four currencies for position trading
Now that we’ve covered the main criteria in deciding the best currencies for position trading let’s look at them below.
This is one of the most widely-traded and volatile currency pairs worldwide. Due to its inherently fluid and substantial liquidity, ‘Cable’ tends to move quite a massive distance pips-wise.
As expected, price movements in this pair are heavily correlated with other USD pairs and the US economy both technically and fundamentally.
Let’s consider the extent of swaps with the pound. If you were trading a standard lot (100 000 units) of this pair through IC Markets, you’d be charged $3.23 (for buying) and $2.50 (for selling) daily.
GBPJPY shares similarities with the pound as both are tremendously volatile and liquid. Both instruments are driven by the same technical and fundamental indicators as Cable when observing the individual economies behind the pair.
Since each pair has GBP as the base, they tend to be positively correlated or move in the same direction most of the time. Yet, position traders may put this on their watchlists to gain exposure to the Japanese economy.
Moreover, the swap rates on this pair are fairly low and consistent across the board.
This pair is included in the list as it also possesses relatively expansive volatility and isn’t correlated with USD, GBP, or JPY. Again, what dictates the technicals and fundamentals is more or less the same as with most markets.
One distinction with this instrument is the swap rates. While you’d be charged $4.25 for going long, the trader would earn $0.36 daily for one lot size (100 000 units).
The rand is a popularly traded exotic market. Historically, USD has generally been stronger than ZAR, but potentially profitable selling opportunities exist for this pair. Exotic pairs are typically more volatile than most non-exotic markets.
EURZAR and GBPZAR are also suitable alternatives to the rand. However, the swap rates may work for or against the trader, depending on the trade direction. Having this on your watchlist is worthwhile if a beneficial chance to go short exists to gain positive swaps.
If you’re going long, it’s trickier as the longer you hold, the more in swaps you pay, which can add up to huge amounts over the long haul.
The currency selection when position trading is only half the story. Arguably, what matters more is your technical proficiency in entering trends at the most optimal time. Position traders generally need more capital.
Of course, this statement is quite bland. However, it’s fair to assume at least in the five-figure range as the trading frequency is severely restricted. So, position traders aren’t really trading, meaning their gains have to be worthwhile compared to other investments.
Lastly, position trading is certainly not everyone’s cup of tea. It takes many years of experience to master since you need the mental fortitude to hold a few positions for tremendously long periods.