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Strategies and risk

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Longer-term strategies

3.5-minute read

If you're looking to generate returns from a few positions that deliver high profits, then you're probably a medium or long-term trader. There are lots of strategies that suit longer-term traders, but here we're going to focus on two of the most common: position trading and swing trading.

What is position trading?

Position trading is a strategy that involves opening a low number of trades, with the aim of delivering healthy gains over the long term. It forms the basis of traditional investing – but is used by many leveraged traders too.

Name:

Position trading

Timeframe:

Medium to long term

Finds trades using:

Mostly fundamental analysis

Requires:

Patience, cool temperament

A common trade in this strategy would be to buy shares in a company that you believe is going to grow over the coming months and years. You wouldn't realise any profits from the opportunity for a long time, and might target a return of 10% or more. Hunting for such wide profit margins can mean taking on more risk from each trade.

Leveraged traders, of course, can short markets as part of their position strategy. To do so, though, you'd need to find an asset that you believe is going to depreciate over a long period.

If you're using leverage as part of your position trading strategy, then you might consider using quarterly forward trades. That way, you won't have to pay overnight financing charges.

You'll also need to ensure that you have sufficient margin in your account to cover any adverse movements in your chosen market. When you're keeping trades open for such long periods, some negative price action is likely.

How do position traders find opportunities?

If you're considering position trading, you'll need to identify trades that offer a large amount of potential upside over a long period. Most position traders will do this using fundamental analysis, examining the facts and figures surrounding each market to try and find under-priced assets.

We'll cover this in more detail in the Fundamental analysis course. Even when your trade is a success, it may take some time for those assets to return a profit – and you may see some turbulence along the way. For this reason, position traders need to have a cool temperament and a lot of patience.

Position vs trend trading

One popular alternative to position trading is trend trading. Instead of looking for undervalued assets, trend traders try to identify significant market moves as they form, then 'ride' the resulting trend for as long as it lasts.

Instead of focusing on fundamentals, trend trading uses technical analysis to spot the higher highs or lower lows that indicate a new trend.

You can look for short-term trends as well as long-term opportunities. Some day traders even this strategy – it isn't restricted to any single style.

What is swing trading?

Swing trading is a strategy that looks to profit from the oscillations that occur within wider market moves. Swing traders will usually trade more frequently than position traders, staying in each market for shorter periods from a couple of days up to several weeks.

Name:

Swing trading

Timeframe:

Medium term

Finds trades using:

Mostly technical analysis

Requires:

Knowledge of indicators

When swing trading, you're aiming to profit from a small part of a longer trend within a given market. Even within strong bull or bear moves, most assets see substantial price action against the prevalent trend. Swing traders attempt to use that price action to earn a return.

Say that the FTSE 100 goes on a bull run from 6000 to 6400 over several quarters. On a chart, this move would almost never look like a straight line. Indeed, there may be days or even weeks of negative action as buyers and sellers vie for control.

Swing traders look to trade these smaller market moves. They'll try to buy or sell a market at the beginning of a mini-trend (or 'swing'), and keep their position open until it ends.

How do swing traders find opportunities?

Like trend trading, swing trading usually involves using technical indicators to decide when to enter and exit positions. A common technique is to identify areas of support and resistance, which typically see reversals in price direction.

We'll cover this in more detail in the Technical analysis course.

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Test your knowledge

Question 1 of 3
You find an underpriced stock using fundamental analysis, buy it, and hold the trade for several quarters. Are you:
  • A Trend trading
  • B Position trading
  • C Swing trading
Question 2 of 3
You see that the DAX is beginning a bear run. You short the market, holding your trade until the move ends. Are you:
  • A Trend trading
  • B Position trading
  • C Swing trading
Question 3 of 3
During the FTSE 100’s bear run, you buy the index to take advantage of a short reversal. Are you:
  • A Trend trading
  • B Position trading
  • C Swing trading