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 tra