Position Trading Strategy

Position Trading Strategy | Backtest and Example Analysis

There are different approaches to trading. While some want to get in and out of the market within the same day, there are those who want to leave their trades on for as long as possible to milk all the profits a trend has to offer. Positional trading fits the latter. But what exactly is positional trading strategy?

A position trading strategy is a method of trading whereby a trader holds a position in the market for a long period (usually several weeks to many months) to extract all the potential profits in the trade. It is focused on capturing the big price moves that happen in a trending market.

In this post, we take a look at the positional trading strategy. At the end of the article, we make a backtest of a positional trading strategy.

What is a positional trading strategy?

Position trading strategy is a method of trading whereby a trader holds a position in the market for a long period (usually several weeks to many months) to extract all the potential profits in the trade.

It is a long-term trading strategy. Rather than aim to capture smaller bits of profits from short-term price moves like day traders do, a position trader purposefully sits in a position for several weeks or even months, waiting for a big price move. The trader rides out the short-term ups and downs of the market price, patiently waiting for their longer-term price objective to be achieved or not.

Position trading is premised on the idea that the market trends. The aim of the position trader is to key into that trend and ride it to its end.

However, position trading is not just about riding a long-term trend because what seems like a trend on the daily timeframe may be a range-bound market on the weekly timeframe. In fact, many position traders have their profit targets before taking a position and often trade between support levels and resistance levels.

Understanding the concept of position trading

The term position trading comes from the concept of taking a position as regards the market direction and sticking with it. Taking a position in the market is comparable to when somebody takes a position on a social issue, where an individual forms an opinion and sticks with it, but in the case of financial trading, the trader takes the position by entering a trade, which can be long or short.

In other words, the trader is taking a position about whether a market will be bullish or bearish for the next several weeks or months. If the trader believes the market will be bullish, he puts his money where his mouth is by making a long trade (buying the asset), but if he believes the market will be bearish, he backs it up with a short trade (short-sells the asset).

Of course, when the market is trending strongly higher (a bull market) or trending strongly lower (a bear market), taking a position to ride the trend makes sense. In such a situation, it makes less sense to jump in and out of the trend trying to take small pieces at a time, which would likely lead to missing parts of the trend and paying much more in brokerage fees.

How position trading works

Position trading works on the basis of the price’s tendency to remain in a trend for a prolonged time. So, a position trader normally has long-term thinking and holds the position for a prolonged period irrespective of the short-term gyrations. The position could be long (purchasing the asset) if he thinks the market is bullish or short (selling the asset) if he thinks the market is bearish.

While position trading is often termed trend following, sometimes, it could simply be trading a long-range sideways market on the weekly or monthly timeframe.

The key thing is that position traders generally try to capture the juicy part of an asset’s movement and stay with their positions for a long time. For many assets, including stocks, there are periods when fundamental shifts cause the price to make huge moves in one direction for quite a long time. These could be caused by fundamental factors affecting the asset individually or its industry as a whole.

If such factors affect the industry’s long-term future, the asset price will see an accelerated move for weeks and months before it stops. It is such moves that the position trader targets. But that does not mean that position traders depend on fundamental analysis alone. Sometimes, they make their trades based on technical setups on higher timeframes.

Which timeframe is best for positional trading?

Of course, different trading styles use different timeframes for their analysis and trading. It would not make sense for a position trader to trade on the hourly timeframe, just as it would not make sense for a day trader to trade on the weekly timeframe.

Generally, the best timeframes for position trading are the higher timeframes, such as the daily, weekly, or even monthly timeframe. But the very best timeframe for positional trading would depend on the trader’s trading strategy and how he plans his trades. While we believe the daily timeframe is the best, it really depends on the trader and the asset you are backtesting.

For instance, a fundamental trader who wants to ride the trend generated by some fundamental changes in a company or its industry might enter a position and monitor it with the trend on the daily timeframe — daily timeframe trends can last for several months. The trader may even trail his profit with a moving average or a Donchian channel.

On the other hand, a price action trader who wants to trade a long-term price range on the weekly timeframe would mark the support and resistance levels on the weekly timeframe and monitor his trade there.

At the end of the day, there is only one way to find out what is the best time frame: you need to backtest. However, we believe (in general) that the best time frame is daily bars:

Positional trading strategy example

As we stated earlier, position trading can take any form. It could be based on fundamental analysis or technical analysis. We will take a look at a real-world example of each.

Example 1, the steel bull market of 2020/2021: Followings China’s handling of its polluting steel plants, the steel prices shot up significantly in August 2020. The global steel supply was affected as China was the steel supplier to the world. As a result, steel prices shot up all through the rest of 2020 and the first three quarters of 2021.

A positional trader would have taken a position in steel stocks outside China to profit from this change or traded steel futures on the COMEX. As the situation lingered for over a year, the trader would have made some good profits. See the steel futures chart below:

Position trading strategy

Obviously, we are using hindsight bias here, but it serves as an example.

Example 2, a range market: This example is on the use of technical analysis; in this case, trading a range-bound market. The EUR/GBP usually trade within a weekly range in the long term. A price action trader could mark the support and resistance levels on the weekly timeframe and go long when the price falls to the support level and go short when the price rises to the resistance level.

In each case, the profit target is just before the other end of the range. See the marked levels in the chart below. Each of those trades lasted some six months or more — that is, the time it took for the price to move from one boundary of the range to the other.

Positional trading strategy example

Positional trading vs. swing trading

Positional trading is not the same as swing trading. The trade duration is much longer in position trading than in swing trading. Positional is more like long-term trading but not as long as buy-and-hold investing. To understand the difference between position trading and swing trading, let’s take a look at what swing trading is.

Swing trading is a style of trading that tries to capture the individual price swings on the daily timeframe, rather than riding the trend to its very end. Such swings last from a few days to a few weeks, so a swing trader normally leaves his trade in the market for that duration.

While swing trades stay overnight and are exposed to overnight risks, unlike in day trading, they do not last as long as positional trades, which aim to ride the trend to its very end. Swing traders mostly focus on technical analysis or quantified trading rules and try to trade individual swings at a time — in a trending market, they aim for each impulse wave in the direction of the trend, and in a range-bound market, they trade the upswings and downswings within the range.

Positional traders, on the other hand, often use both fundamental and technical analysis and try to ride the trend on the daily timeframe to its conclusion.

Even when they trade range-bound markets on the weekly timeframe, it still appears like a trend on the daily timeframe. When using a stop loss, position trading often requires wider stops and, as such, the position size has to be reduced to control risk. This is one benefit swing trading has over position trading.

Even though position trading may make more profits in each successful trade than swing trading, the profit is on a smaller position size. In other words, swing trading is easier to scale than position trading. Both trading styles make money. Choose the style that suits your trading personality and circumstances.

Position trading strategy backtest – does it work?

Let’s go on to backtest an example of what we can label positional trading strategy. The example is an example of a sector rotation strategy.

Our positional trading strategy trades four ETFs: SPY (S&P 500), TLT (long -term Treasuries), EFA (developed stock markets ex. USA), and EEM (emerging markets).

The trading rules and settings are like this:

  • It’s based on monthly quotes in the ETFs SPY, TLT, EFA, and EEM.
  • Every month we rank all four ETFs based on last month’s performance/momentum.
  • We go long the ONE ETF with the best performance the prior month (it doesn’t matter if negative or positive return).
  • Hold for one month and rinse and repeat (or continue being long the same instrument).

The logic and trading rules are easy to understand, but it requires some difficult code to backtest the strategy successfully (you can purchase the code and logic for all free articles).

If we type in the trading rules into Amibroker (please read our Amibroker review) we get the following equity curve from 2002 until today:

Positional trading strategy backtest

The strategy worked really well until it was hit by both lower share and bond prices in 2022. Despite the poor performance in 2002, the strategy had the following statistics and performance metrics:

2022 was a disaster year where most of the winners in one month turned out to be losers the next – the opposite of the prior two decades.

This shows the inherent problem with all trading strategies: the future is unknown and it will never be the same as the past. Because of this, we prefer strategies that are based on a shorter time frame. We can call it swing trades, and we hold positions for substantially fewer days than in this post: average holding time is just a few days (single digits). Our best trading strategies can be found here:

List of trading strategies

We have written over 1000 articles on this blog since we started in 2012. Many articles contain specific trading rules that can be backtested for profitability and performance metrics.

The code for the backtested positional trading strategy is included in the package.

The trading rules are compiled into a package where you can purchase all of them (recommended) or just a few of your choice. We have hundreds of trading ideas in the compilation.

The strategies are taken from our source of what are the different types of trading strategies. The strategies are an excellent resource to help you get some trading ideas.

The strategies also come with logic in plain English (plain English is for Python traders).

For a list of the strategies we have made please click on the green banner:

These strategies must not be misunderstood for the premium strategies that we charge a fee for:

FAQ positional trading strategy

Let’s end the article with a few frequently asked questions:

What is a positional trading strategy?

A positional trading strategy is an approach to trading that involves taking a longer-term view of the markets. It’s kind of a long-term strategy, but far from a buy-and-hold strategy.

Traders who use this strategy will typically hold their trades for weeks or months at a time and will look to capitalize on any long-term trends or market cycles that may exist.

Is positional trading suitable for beginner traders?

Yes, positional trading can be suitable for beginner traders, as long as they understand the risks associated with this trading style. Beginner traders should start with a small account balance, practice with a demo account, and use limit orders to protect from excessive losses.

Also important is to backtest any strategy you might have. It’s the only way to find out if you have a positive statistical edge!

What are the benefits of positional trading?

Positional trading can provide a number of benefits to traders, including reduced trading costs and less time spent in front of the computer.

By taking a longer-term view of the markets, traders can also benefit from the greater potential for profits associated with larger trends and market cycles. Less capital is consumed by commissions and slippage.

What types of analysis are used in position trading?

Technical analysis is typically used in positional trading, as well as fundamental analysis. Traders will often look at chart patterns and indicators, while also keeping an eye on key economic data releases and news events that may have an impact on the markets.

That might be fine, but we prefer another approach: quantified trading rules with 100% testable strategies. We threw away our charts and trendlines two decades ago and that was one of the best decisions we have ever made. To understand why, please read the articles below:

What types of orders should I use in positional trading?

It is important to use limit orders when trading, as this will help to protect from excessive losses. It is also important to use a trailing stop loss order, as this will allow traders to lock in profits as the market moves in their favor.

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