Position trading strategies

Position trading strategies

Position trading is a kind of trading that is best suited for the super-patient, witty and long-sighted traders, those who have a real feel for the markets. Their primary goal is to benefit from the dominant trends rather than from short-term market fluctuations. Typically, they use fundamental analysis for their trades, but sometimes they need to refer to technical tools as well.  And one more key characteristic that defines position traders – they have sizable accounts to trade with.

There are at least two main advantages of position trading:

  1. While trading you may capitalize on the interest earned, not only on your trades. This is because interest or swap is paid on the currency that is borrowed and earned on the one that is bought.
  2. Being a position trader you might benefit from the correlations that exist between currencies and other financial instruments.

In the following article, we are going to explore the strategies that encapsulate the two aspects of position trading mentioned above – swap and commodity correlations.

Strategy 1

To set an example, we have decided to take CAD/JPY currency pair.   

Canada is one of the world’s largest oil-producing nations; it is a well-known exporter of this commodity. So, the Canadian dollar is normally hit when oil prices decline. In contrast, Japan is considered to be a net oil importer. This causes the yen to weaken when oil prices post their largest gains and make oil prices dynamic a leading indicator for the movement of CAD/JPY currency pair.  

Key ingredients:

Timeframe – daily

Indicators – the average true range (ATR) indicator for setting stop losses.

Strategy concept

Long trade setup:

  • identify the resistance on the daily technical chart of oil futures;

  • find a candlestick that closes above the resistance;
  • enter long on CAD/JPY as soon as the next candlestick opens;
  • place the stop loss at twice the ATR of the previous candle, which is 202 pips;
  • set the take profit at a risk to reward ratio of 1:3.

For short trades:

  • identify the support of the oil chart on the daily timeframe;

  • find a candle that closes below the support;
  • enter short on CAD/JPY at the opening of the next candlestick;
  • place the stop loss at twice the ATR of the previous candle which is 146 pips;
  • set the profit target at a risk to reward ratio of 1:3.

Strategy 2

A correlation coefficient is a number describing the extent to which two financial instruments are correlated (the number varies from -1 to +1). The number which is between 0 and +1 stands for the existence of the positive correlation between two financial assets; the number between 0 and -1 tells us about the existence of the negative correlation.   

The strategy we are going to describe here exploits the inverse relationship between the Dollar Index (the index measuring the value of the USD relative to the value of a basket of major currencies) and price of gold. As a rule, the US dollar index falls, when gold rises.

Key ingredients:

Timeframe – daily

Indicators – ATR indicators

Financial instrument  – XAU/USD + the price action of the Dollar Index (as a trigger for trading XAU/USD)

Strategy concept

For long setup

  • identify the support on the Dollar Index chart (use daily timeframe);

  • identify a candle that closes below the support;
  • enter long on gold at the opening of the next candlestick;
  • set the stop loss at twice the ATR as the previous candle;
  • set the profit at a risk to reward ratio of 1:3.

For the short trades:

  • find the resistance line on the Dollar Index chart (daily timeframe);
  • identify a candlestick that closes above the resistance;
  • enter short on gold at the opening of the next candle;
  • set the stop loss at twice the ATR as of the previous candle;
  • set the profit target at a risk to reward ratio of 1:3. 

 

 Source: the strategies retrieved from the book of "17 Proven Currency Trading Strategies" by Mario Sant Singh 

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