Long-Term Trading Strategy | Backtest And Example Analysis
Some people hold their trades for short periods, even as little as a day, while others hold theirs for quite a long time. While the former is known as short-term traders, the latter are called long-term traders. But what does a long-term trading strategy mean?
A long-term trading strategy refers to a style of trading where a trader holds a position for an extended period of time. Depending on the type of asset, the holding period can be as little as one year or as long as 30 years or more. While there is no upper limit to how long an asset can be held in long-term trading, for tax considerations, it has to be held for, at least, one year to be considered a long-term trade.
In this post, we take a look at the long-term trading strategy. We go one step further and make a backtest of how you can invest in a long-term trading strategy and how you can supplement it with short-term swing trading strategies.
Long-term trading strategies
We have written many other long-term trading strategies:
- The Best Performing Stock Markets In The World Since 1900
- Long-term strategies — What Is It? (Backtest)
- Fundamental Analysis Trading Strategy (Backtest And Example)
- Bull Market Signal Strategy – How To Predict A Bull Market (Backtest)
- How likely are you to go broke as retired or FIRE? (Sequence risk, diversification, and withdrawal rate)
- Dollar cost averaging vs. lump sum investing backtest – sequence of return risk (luck, skill, or magic?)
- Lump Sum Investment Strategy (Buy & Hold, Example, Performance, Returns)
- How does war affect the stock market historically?
- Long-Term Trading Strategy (Backtest And Example)
- Positional Trading Strategy (Backtest And Example)
- Do stocks outperform Treasury Bills? (Not what you expected)
- Buy the Dip Strategy — What Is It? (Backtest And Example)
We also give you a humble reminder that we have written about hundreds of different trading strategies.
Key takeaways
- Long-term trading refers to a style of trading where a trader holds a position for an extended period of time – most likely years.
- For most people, a passive long-term strategy of buying and holding is the best option to create wealth. You have to find out what is best for you.
- Short-term swing strategies can be an excellent diversification tool for your long-term strategies.
What is long-term trading?
Long-term trading refers to a style of trading where a trader holds a position for an extended period of time. Depending on the type of asset, the holding period can be as little as one year or as long as 30 or more years. There is no upper limit to how long an asset can be held in long-term trading. For tax considerations, a trade has to be held for, at least, one year to be considered a long-term trade (in the US – it might be different depending on your residency).
The term, “long term”, can mean different things to different people, but it is generally thought to be in the range of 5 to 10 years of holding time. However, once a position is held for more than one year, it is already considered a long-term trade by tax authorities (in the US). Profits from long-term trades are often taxed differently than those from short-term trades (lasting less than a year).
In stock trading, for example, if you buy a stock and hold it for more than a year it is considered a long-term investment and any profit you make from the trade would be taxed based on the long-term capital gain model, which is much lower (5-15%) than what is charged on short-term gains (20-30%).
Typically, a long-term trader can hold a stock for many years and benefit from dividends and the power of compounding if the sto