The art of holding: Advanced techniques in position trading

When it comes to trading, some prefer the steady pace of long-term strategies over the rapid-fire decision-making required in day trading. Positional trading, a style that involves holding trades for weeks or even months, offers an approach that capitalizes on the cyclical nature of markets. This article explores the intricacies of positional trading, its history, techniques, and practical applications, particularly in CFD markets. Whether you're a seasoned trader or just curious about this method, we'll guide you through the pros and cons, and how to navigate the complexities with a balanced mix of technical and fundamental analysis.

Content:

1. What is position trading?
2. Position trading vs. swing trading and day trading
3. The origins of positional trading
4. Position trading cycles
5. The role of market sentiment in position trading
6. Position trading the markets
7. Best timeframes for positional trading
8. Technical and fundamental analysis
9. Risk management in position trading
10. Position sizing and portfolio diversification
11. Advanced position trading strategies
12. Pros and cons of positional trading
13. Psychological aspects of positional trading

What is position trading?

Position trading meaning

By definition, position trading is a trading style that pursues holding a position for weeks and sometimes even months. More often, the average holding period for position traders is between two and six months. Position traders capture relatively big swings, capitalizing on the cyclical nature of various markets, which turn from trading ranges to trends and back.

Position trading vs swing trading and day trading

Positional trading, swing trading, and day trading are distinct trading strategies that differ primarily in their timeframes and approach to price movements. Position traders are focused on the long-term, holding positions for a long period of time—often months or even years—to take advantage of long-term trends in the market. They rely on fundamental analysis and broader market cycles, aiming to identify key entry and exit points that allow them to benefit from significant movements in price over an extended period of time. This strategy contrasts sharply with day trading, where traders are highly active and seek to capitalize on short-term price fluctuations within a single trading day.

Swing trading sits somewhere in between, as it involves holding trades for a period of time that typically spans a few days to several weeks. Swing traders aim to identify shorter-term price movements within larger trends, capturing gains from market swings without committing to positions for as long as position traders do. While swing and day traders may react quickly to market changes, position traders are more patient, willing to hold their positions for a long period, and ride out minor market fluctuations to benefit from the broader trends they’ve identified.

The origins of positional trading

Historically, position traders were mostly traders operating with significant capital. The reason is simple: it’s relatively difficult to accumulate a big position quickly without influencing the market. Historically, during the times of trading pits, when traders had to work in the “open outcry” mode, day traders and scalpers usually operated on the “floor,” while position traders usually represented big institutional clients and gave orders to the “floor traders” from “upstairs.”

Once the big order approached a trading pit, traders started actively competing for it to provide a better execution.

Richard Dennis and the “turtle” experiment

Positional trading became popular among the general public after Richard Dennis, a famous trader in the 1980s known as ”Prince of the Pits,” launched an experiment, teaching his strategy in the commodity markets to a group of people that he referred to as "turtles." 

The experiment was successful, and after some time, the members revealed the rules of the applied strategy. It was a trend-following or momentum breakout strategy. Back then, the adoption of trading among retail traders and the amount of noise in the price data were low. That’s why simple strategies, such as “Donchian channel breakout,” worked quite successfully.

Nevertheless, this experiment opened a path for individual traders to enter the futures markets (and later, Forex and CFD markets). While the stock market already had a deeper history, commodities were considered markets for professionals. The “turtle” experiment showed individual traders that position trading is a suitable strategy that is not only for pros.

Position trading cycles

The goal of a position trader is to capture the moment the cycle changes. Trading ranges change to trends, and trading ranges with low volatility change to ones with high volatility, etc. 

On the other hand, day traders can work within one chosen cycle, for example—buying multiple times when the trend increases. Position traders need to have the skill to find and execute a trade early before the trend develops.

That brings us to the well-known triad from technical analysis: accumulation, public participation (or an impulse phase), and distribution. The best low-risk opportunity for a position trader lies between the end of the accumulation phase and the beginning of the impulse phase.

The role of market sentiment in position trading

Market sentiment plays a crucial role in influencing both short-term price movements and long-term trends in the market. For the trader employing a positional trading strategy, understanding market sentiment is vital to identifying when a trend may start or reverse over the long term. Sentiment indicators, such as the VIX (Volatility Index) and the Put/Call ratio, provide valuable insights into how optimistic or pessimistic the market is, which can help predict potential trend shifts. By incorporating these types of sentiment analysis into their strategy, position traders can enhance their ability to enter and exit trades at the right times, ensuring they align with the broader market mood.

Position trading the markets

Which asset class is more suitable for position traders? First, one needs to recognize the ability of the asset to boost and maintain long-lasting trends. In short, every asset class can be used for positional trading, but not always.

Position trading Forex

Currency markets (FX) are known primarily for their range-bound nature. But sometimes, tectonic shifts in the monetary policy of a corresponding central bank drive the related currency against the other. An example is the Japanese Yen, which weakened throughout the first half of 2024 and maintained a long-term downtrend but later reversed and strengthened with increased volatility.

Thus, positional trading for FX markets requires finding a window of opportunity along with changes in the fundamentals, especially rapid changes in expectations about interest rates.

Position trading commodities

Commodity markets are known for their furious and fast trends, especially during periods of high inflation or disruption of supply and demand (trade restrictions, weather conditions, etc.). At the same time, they also tend to stagnate and stay in trading ranges for a long time.

Sometimes, commodity markets display high volatility and produce greater-than-average gains. For example, in early 2024, copper experienced gains exceeding 25% (from $3.7 to $5.2). A savvy trader could capitalize on this move and make a decent profit.

Energy markets, such as crude oil and natural gas, also occasionally experience high volatility driven by geopolitical events worldwide.

Position trading stocks and stock indices

Stocks tend to provide long-term trends and may double, triple, or quadruple in price within a single year. The most vivid example of such behavior was displayed after the COVID crisis from 2020 to 2021 when the value of many technology stocks increased several times. This cycle was repeated in 2024 when markets rebounded after the correction.

Position trading cryptocurrencies

Crypto markets, especially Bitcoin and Ether, periodically produce increased volatility and elongated trends, displaying a cyclical nature. Thus, they might also be interesting for positional trading.

Best timeframes for positional trading

The major working timeframe for position traders is the daily chart (D1), so the market structure for position trading is usually analyzed according to this timeframe. However, the execution of the position might involve other timeframes, such as H1, M30, or H4.

Nevertheless, understanding the daily structure is a cornerstone of positional trading, and a basic skill of every position trader.

Technical and fundamental analysis

The “base pattern”

As mentioned above, a positional trader's primary goal is to capture a moment when the trading range (or an accumulation phase, speaking in technical analysis terms) transitions to a trend.

The easiest way to gauge this moment is to define a chart pattern that precedes the breakout. The basic chart pattern is a ”base” or a long-term trading range when the market consolidates, losing volatility over a period of 3-6 months.

For example, the classical long-term base pattern was visible on the IBM stock chart. It had rested in a trading range for a long time before November 2023, and then it transitioned to the impulse phase.

Another example of a big trading range preceding the move was visible on the  GBPJPY chart. Whereas the obvious direction of this currency pair was long, the trend was already mature. After the false breakout of a massive wedge pattern (which is also a type of base pattern), traders could get a decent opportunity for a short position, which quickly developed after the Bank of Japan restricted monetary policy.

The confirmation

Finding a moment in the changing cycle is not the only thing that counts; execution also matters. That's why, even for a position trader, execution and timing are crucial: they would allow the appropriate stop-loss to be placed and then observed.

After a base pattern’s breakout, it makes sense to observe a confirmation. This is usually a pullback from a moving average of at least a short duration (20 days).

Usually, a pullback and retest of a 20-day moving average, especially accompanied by a candlestick pattern, such as an engulfing pattern, gives a better timing for entry.

Here’s an example of a trade entry for copper in March 2024. It’s visible that the initial breakout from the base hasn’t given a good entry point. Still, another opportunity appeared after the price pulled back to the 20-day moving average and closed as a “pin bar” candlestick pattern (a reversal pattern). After that, a bullish rally evolved.

Another example may be found on the IBM stock chart (which signaled the base pattern breakout in November 2023). After the cycle had changed, a trader could have entered immediately or after a pullback to the 20-day moving average inside of a smaller “flag” formation or even after the breakout of this flag for less risk-seeking traders.

Aligning a position with a general destination (a rising trend) gives a trader more confidence to hold that position. Depending on a trader’s trading style and personal preference, they may hold a position for two to six weeks or even longer.

The importance of fundamental analysis

Fundamental analysis might have a limited application in day and short-term trading (except for news announcements and the economic calendar). However, it provides much greater value in position trading, especially when anticipating a big move in the market and focusing on the opportunity.

The simple way to leverage fundamental analysis is to watch the performance of the entire market (as with stocks). If it’s bullish, it may increase investors’ risk appetite and help boost the price.

The more complex approach is to observe changes in key fundamentals, which are not yet represented in the price action, and try to trade according to it.

Here’s an example of the application of fundamental analysis to the GBPJPY situation discussed above:

While the Japanese Yen was weakening, as carry trade operations were actively developing, the Bank of Japan warned traders about the possible upcoming intervention. Yields of 30-year Japanese Government Bonds continued growing, indicating a further change in Japanese monetary policy. This situation made short trades on the Yen particularly risky while leading savvy traders to focus in the opposite direction (to find potential shorts for USDJPY, GPBJPY, and other similar pairs).

Risk management in position trading

Risk management in position trading is vital, as holding trades in the market for a long period increases exposure to various risks. Unlike more active strategies, such as intraday trading, where trades are short-lived, position traders often adopt a buy-and-hold approach, requiring careful planning. To protect against unfavorable market movements and optimize gains, traders need to be strategic in setting stop-loss and take-profit levels. Establishing clear entry and exit points minimizes potential losses while allowing room for long-term gains. This balance between risk and reward is essential for sustaining success in position trading.

Position sizing and portfolio diversification

Position sizing is a critical component of this type of trading, particularly for traders looking to hold positions for a long term, often spanning months or even years. Determining the appropriate position size involves assessing your account size, risk tolerance, and current market conditions. A key strategy is to allocate a portion of your capital that aligns with your risk tolerance, ensuring that no single trade puts a significant portion of your account at risk. For example, if the market and your analysis indicate potential volatility, you may decide to take a smaller position to protect your capital. Conversely, a larger position might be appropriate in more stable conditions but always within the bounds of your overall risk management strategy.

Diversification is equally important, especially given the longer-term nature of this type of trading. Spreading risk across different types of markets or asset classes—such as stocks, commodities, or currencies—helps mitigate the potential impact of adverse movements in price in any single market. By diversifying, you can balance the risks and rewards across your portfolio, ensuring that gains in one area can offset potential losses in another. This approach allows traders to maintain a more stable portfolio over the long term, even as individual positions fluctuate. Diversification reduces the reliance on any one position in your portfolio, providing a lot of flexibility and security in your longer-term trading strategy.

Advanced position trading strategies

Advanced positional trading strategies, like trend-following, mean reversion, and margin trading (trading with leverage), allow traders to refine their approach and maximize gains. These techniques require a deep understanding of market dynamics and risk management, helping traders navigate fluctuations and capitalize on longer-term trends while managing risks.

Trend-following vs. mean reversion

Trend-following focuses on riding long-term trends, working best in strong, directional markets. Mean reversion, on the other hand, capitalizes on movements in price returning to their average, ideal for range-bound markets or short-term corrections within longer trends.

Using leverage in position trading

Leverage can boost gains but also heightens risk. To manage this, traders should use leverage cautiously, align it with their risk tolerance, and implement strict stop-loss orders to protect against significant losses while maximizing potential returns.

Pros and cons of positional trading

Every trading style has advantages and risks; positional trading is no exception.

Advantages of position trading

1. Less activity

While positional trading is not passive investing, it is quite an active trading style. When a position develops, a trader needs to maintain it, which doesn’t consume much of the time. In other words, the market does all the work while the trader enjoys the ride.

2. More room for mistakes

That’s right. Intraday trading is a more demanding trading style, as day traders need to constantly display “A-class” performance to keep moving forward. Position traders might be less accurate and sometimes catch unnecessary stops (while it’s not recommended). The room for mistakes is greater for position traders because they are not dealing with intraday action (which may be quite “noisy”) as much, while on the other hand, trading less actively overall.

Disadvantages of position trading

1. Harder to achieve consistency

Even though positional trading is less demanding, it relies on trends. If you have a trend, you have a trade. If not, you need to stay out and observe. That’s also fair for day traders, but they tend to make at least one trade daily, whereas position traders may not have a single trade within a week.

That also translates to an imbalance between profit accumulation and drawdowns. Simply said,  profit is generated quickly in positional trading(often within  2-4 weeks), while the drawdown may last for months. Profit may exceed the drawdown multiple times, but you can’t withdraw profit while in a drawdown. So, position traders usually focus on long-term gains rather than weekly or monthly income.

2. Lack of statistical data

Position traders tend to generate substantially fewer trades than day traders. That’s why, sometimes, it’s difficult to say if a trader does well (and receives systemic losses) or makes mistakes. It may be only seen in hindsight. A trader must collect substantial data to make an educated guess about performance. In positional trading, the data is accumulated slowly, an obvious disadvantage for systematic traders.

Historical data also contains less data for backtesting for positional trading. This might decrease a trader’s confidence while increasing the role of personal experience and knowledge of fundamentals.

Psychological aspects of positional trading

This style of trading demands a strong psychological foundation. In the paragraph below, we share several aspects of positional trading, how they affect a trader’s psychology, and tips on managing them.

Patience:

• Essential for holding positions over long periods, sometimes months or years.
• Helps traders resist the urge to make impulsive decisions based on short-term market fluctuations.

Discipline:

• Crucial for sticking to a well-defined trading strategy, even when the market moves unpredictably.
• Ensures that traders follow their entry and exit plans without being swayed by emotions.

Emotional resilience:

• The ability to stay calm during market volatility and avoid panic selling.
• Helps traders manage stress and maintain focus on long-term goals.

Confidence in strategy:

• Believing in your trading plan, especially during drawdowns, helps maintain consistency.
• Regularly reviewing and adjusting your strategy reinforces confidence in the face of adversity.

Managing drawdowns:

• Accept that drawdowns are a natural part of long-term trading.
• Focus on the bigger picture and avoid making drastic changes based on temporary losses.