Explained: What Is Position Trading vs. Swing Trading?
You might be wondering what do the wealthiest investors in the world have in common? The quick answer is that they use money to find more money. Instead of saving, they re-invest and envision a fortune in the longer-term. In other words, they see the bigger picture (the long-term trends) and then trade in that direction. So, if you’re thinking of position trading, good! You’re halfway there.
And you know what? Position trading helps traders to find significant trends and take advantage of long-term investing. This trading style has a competitive advantage compared to the short-term trading styles like day trading, which has many pitfalls.
So, let’s get down to business.
Below is the guide you want to know about position trading and the main concepts to learn about this trading approach. The best part, it’s supposed to give you the idea to find potential trading positions. KEY TAKEAWAYS
- Understanding what is position trading and how it differ from other trading styles like day trading and swing trading.
- Learn how to position trade with different strategies including breakout trading, pullback and retracement, range trading, and more.
- By the end of the post, you should know if position trading is something for you. If not, what’ll be ideal for you.
What Is Position Trading?
Position trading is a trading style where the investor holds a position (long or short) for an extended period. With position trading, the time horizon goes from days, weeks, to even years. The main purpose behind this long-term trading strategy is to take advantage of the more prominent trends.
Position trading is beneficial, especially compared to other trading styles, let’s say, (day trading or swing trading); it offers the opportunity to catch larger price movements on a percentage basis. Therefore, providing more potential for profit in the long term.
Let’s be real. There’s no one size fits all kind of trading strategy, and position trading is no exception.
The key is to decide on a trading style that is aligned with the personality and profile. To give an overview of a position trader’s day-to-day life, here’s how it looks like:
Usually, this style provides more time and less stress because you don’t have to stay glued to the screen every day, and any minor fluctuation shouldn’t affect the long-term view of the asset. The critical element that differentiates position trader and day trader is patience. Position traders rather prefer to wait for the expected movement.
Usually, position trading is more suitable for those who have more commitments outside of the market. That means it’s ideal for those who have a full-time job, family, business, or more personal obligations. Additionally, institutional traders heavily utilize this approach to build positions that could generate bigger yields in time.
How Does It Work?
There are many ways how position trading can be applied. However, most are based on technical analysis, fundamental analysis, or a mixture of both. Those two forms of analysis are essential as they are literally the pillar to make sound investment decisions.
The fundamental analysis is slightly different from the crypto space because the cryptocurrencies don’t have the same characteristics as other assets (like stocks or forex). However, the main idea behind the fundamental analysis is to find the “fair” crypto value and define based on the current price if the cryptocurrency is undervalued or overvalued.
Some of the main factors to have into consideration are:
- On-Chain metrics: they can be measured “manually” running a node of the desired network; notwithstanding, this process is time-consuming. A better option is to find this information on specialized websites that are dedicated to generating those metrics. The transaction count helps to visualize the activity of a given cryptocurrency network.
- The transaction value: it gives the information about the amount of money in the crypto network; this amount could be represented on a regular currency like USD or a cryptocurrency.
- The whitepaper: there is where some details of the project are shown, such as the distribution and supply scheme, the technology used, features, upgrades, etc.
- The information about the team behind the cryptocurrency network is important to define the project’s chances of success.
On the other hand, technical analysis is related to the study of prices and volumes, allowing for better timing for entries. Additionally, it provides objective price levels where crypto investors could define the risk, profit targets, and areas where the position can be built. There are many position trading strategies built upon technical analysis; some of them will be explained later in this article.
It is important to remember that position trading uses long-term time frames; weekly, monthly, and yearly charts are the primary reference for the position traders. That is because they can identify the long-term trends and eventually define possible entry points.
An example of this trading style can be observed in the action of Bitcoin (BTCUSD) weekly chart, where the price increased its value by 1100% (from the low to the high) in 10 months. This sample provides an idea of the potential of using a position trading approach.
Position Trading vs. Day Trading vs. Swing Trading: Differences
The main difference between day trading vs. swing trading vs. position trading is the holding period. The holding period is the duration of time between the purchase of a cryptocurrency and its sale.
Additionally, it’s relevant to notice that some of the most significant returns come from directional markets with a considerable volatility amount. Nowadays, the cryptocurrency market matches those criteria. Therefore, it would be an interesting vehicle to establish long-term positions (position trading) that can yield exciting returns.
Position Trading vs. Day Trading
In short, position trading is the direct opposite of day trading. Mainly because position trading implies holding positions for extended periods (months to years) while day trading is entering and exiting trades during one trading day.
Day trading requires more daily attention because the trader must be in front of the screens throughout the day. Meanwhile, the position trader only has to check the market a few times a month because the time horizon is long.
Here’s an example of how trading Ethereum (ETCHUSD) shows the difference between position trading and day trading:
- Position traders (weekly chart) waited six months for the trend to develop but netted a 980% return.
- Compared to day traders (10-minute chart) who waited 2.5 hours for an intraday trend to develop and only netted a 2.2% return.
Position Trading vs. Swing Trading
Swing trading is when the trader holds a position (long or short) during days or weeks, and it differs from position trading because the holding period is lower.
Although it doesn’t require as much time of attention as day trading, a swing trader must still check the prices several times per week. A rule of thumb, you must always be aware of the medium-term fluctuations that could affect the asset.
In the chart above of ETHUSD, depending on the trading style, the time of price development takes different magnitudes. In position trading (monthly chart) 15 months while in swing trading (Daily chart) 9 days.
Find out some of the swing trading strategies.
Position Trading Strategies
In regards to position trading strategies, there are several methods that a crypto investor can apply. Because position trading involves tactically buying and holding cryptocurrencies for the long run, some of the technical analysis strategies used to time the market includes— moving average, support and resistance, breakouts, pullbacks, and range trading.
The main reference for this kind of trading style will be the larger time frames, such as the weekly, monthly, and yearly charts.
Let’s start by analyzing the trading breakout.
Breakout trading is when the entry is placed at the point where a relevant swing high is broken. This high could be an all-time high or a relevant level defined by the monthly or yearly chart.
The idea is that after the entry is triggered, the price must keep going. If not, the trade must be obliterated immediately.
BTCUSD is a good example; see how after the price broke the 12.473 (black dot = entry) level, it went straight up, breaking the most relevant previous structure. The stop loss should have been located just below the bar that triggered the breakout.
Moving Average trading
This strategy uses moving averages to identify possible continuation points after the price has reached its mean (the average) before continuing in the previous movement’s direction. Usually, this strategy yields better returns in trending markets.
One of the most used averages is the 9EMA. It is usually an indicator of momentum and provides good entry points when the momentum is strong.
For example, in the chart below the ETHUSD weekly chart, we can see how the 9EMA (black line) acted as dynamic support and eventually marked ideal entry areas to build a core position trading towards the long side (black arrows).
Support and Resistance Trading
The concept of support and resistance levels is a popular yet powerful method to define entry and exit points. In essence, the support and resistance levels are key price levels on the crypto chart that tend to stop a cryptocurrency price from going any further.
Usually, when the support or resistance is tested several times, it can provide a solid area to place an order and define the risk.
In the sample above, the Litecoin weekly chart (LTCUSDT) was revolving around the 38 – 40 support area. See how previously the action was supported around this level (black dots) and eventually provide a good entry point where the risk was low compared to the possible run to the upside (Green arrow).
Learn how to find support and resistance level.
Pullback and Retracement Trading
Pullback and retracement trading is when the trader looks for an entry on a corrective action within the context of a trend. The main idea behind pullback trading is to wait for a retracement during a trending move and use additional price action with some exhaustion action. Such as a Doji formation or a Fibonacci retracement to provide accurate timing.
In the weekly chart of BTCUSD, we can see two main spots to define a long entry (black dots). One after the Doji formation and one after the inside and up candle. Additionally, the stop loss should be placed below the previous swing low.
Range trading is a method that seeks to exploit trading opportunities when a cryptocurrency bounces between support and resistance level, which acts as a price barrier. The price zone between the support and resistance levels is what most technicians refer to as being the range.
Usually, a price range is established when we have multiple bounces off support and the resistance level. On the price chart, this will appear like the price is being “trapped” inside a consolidation without having a clear direction.
In the context of position trading, the main idea is to play the breakout in the prevailing trend direction. For example, if Bitcoin is in a strong uptrend, you would want to buy the breakout of the resistance level.
Here in the daily chart of BTCUSD, we have identified a well-established range that eventually fueled a movement to the upside as soon as the price broke above the upper limit of the price range.
Of course, position trading is attractive. But the real deal is because it allows you to have:
- More time outside of the screens, therefore, more freedom with your time.
- Less pressure compared to other trading styles like day trading, where minor fluctuations can increase the levels of stress.
- Lower costs related to commissions.
- Higher rates of return.
- Helps avoid the noises (referring to information or activity that confuses or misrepresents underlying trends) present in lower time frames.
Position trading also has risks associated and must be understood before applying this approach.
Here’s what you must know:
- Less equity is available because the capital is located in long-term positions, so maybe if another opportunity presents and the portfolio is already invested in a basket of a few cryptocurrencies, there will not be enough capital to open another position.
- Given the long holding periods, it is probable that the investor loses his patience and ends up closing a trade that hasn’t developed its full potential.
- Long-term investing requires in-depth knowledge of the market’s assets, including stocks or crypto you’re trying to invest in. In this regard, it’s not sufficient to rely on technical analysis, but investors need to evaluate the quality of tokens and coins through fundamental analysis.
Which Trading Styles Suits You?
The best style must suit your personality of each crypto investor and his experience in the market. For example, if you find yourself struggling to find some spare time to trade, it’s best to choose a position or swing trading. You can check the market a few times per week or month to manage your positions accordingly to the medium and long-term action.
However, if you prefer immediate results, day trading is for you. There, you can see a daily profit and loss without stressing over an overnight position.
- Fortunately, the cryptocurrency market offers many characteristics that suit any trading style. Specifically, it has excellent potential for position trading because its explosive movements are an opportunity where the skilled trader can benefit from. Some interesting aspects of this market are a wide variety of cryptocurrencies.
- Good volatility and liquidity
- It’s a 24/7 market, so it provides the flexibility to trade at any time.
- Leverage that allows taking more prominent positions (important to have adequate risk management to control risk.)
Usually, institutional traders and more experienced traders prefer position trading as they typically trade with big order blocks. These are buy-and-hold traders compared to retail traders who have a shorter time horizon and choose day trading or swing trading.
Position trading is a style that allows investors to participate in the major trends and eventually outperform the average trader returns. It perfectly suits traders who have limited time due to different commitments outside of the market environment (family, work, or business).
Additionally, it offers the opportunity to avoid the random “noise” usually found in lower time frames, where a minor fluctuation can shake out the trader’s positions. All and all, position trading is a great approach to participate in significant trends and increase profits exponentially.