Position trading: Riding the waves of long-term trading

Stanislav Bernukhov

Senior Trading Specialist at Mt8Pro

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This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.

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In this guide:

  1. Basics of position trading
  2. Understanding technical patterns for position trading strategies
  3. Stock trading position management
  4. How position traders manage a trade
  5. Fundamental analysis of stocks trading
  6. Summing up position trading for stocks
  7. Ready to try position trading stocks?

Position trading, by definition, is a strategic approach employed in financial markets, primarily within stocks, commodities, and the foreign exchange (forex) arena. This method involves holding trading positions for an extended period of time: weeks, months, or even years, under the belief that the asset's worth will increase over that extended period.

When applied to stock markets, position trading might be particularly relevant, since many stocks tend to make substantial price moves over a long period of time.

For example, TSLA stock grew from $23 in 2020 to a peak of $433 in 2021*. Even though it was a bumpy road, there were still multiple long-term position trading opportunities for TSLA during that time.

In this article, we highlight crucial elements every position trader needs to keep in mind when creating position trading strategies for trading stocks, including technical and fundamental analysis, identifying significant long-term trends, understanding market fluctuations and market sentiment, and some of the risks involved compared to other trading strategies.

Basics of position trading

Historically, position trading has been the most popular trading style in the stock markets after passive investing, since stock markets are known for bullish long-term trends. This is especially true for US stock markets.

Why do position traders like to trade stocks?

Some fast-growing stocks may produce double or even triple-digit annual returns, which correspond to sustainable long-term trends. That’s what makes position trading particularly attractive for trading stocks.

Another reason long-term stock trading has become popular is because a regular trading session on the NYSE or Nasdaq stock exchanges is limited to 6.5 hours per day (from 09:30 to 16:00), which may be considered too narrow a window for day trading. Trading beyond the mentioned time limits is considered either “premarket” or “after-market close”. Volumes outside regular trading hours are very low, so traders usually don’t trade actively during that time.

Day trading stocks is limited to a very narrow time range of a few hours per day. Therefore, swing trading and position trading are more favorable trading styles for stocks.

Position trading vs swing trading for stocks

Swing trading and position trading involve holding trades overnight (and sometimes, over the weekend). However, these two trading styles have some differences, which are important to highlight.

Swing traders aim to capitalize on short-term price movements, and may trade in both directions in a short-term trading range. On the other hand, most position traders need a more significant prevailing trend in order to make substantial profits.

That’s why, position traders need to focus on both technical analysis and fundamental analysis. This approach helps you identify potentially good “runners” – stocks of companies that have a long-term growth potential on the one hand, and not look overheated in terms of valuations, on the other.

Understanding technical patterns for position trading strategies

If you’re a trader aiming to join an extended rally (a long trend), you would probably want to join as early as possible. That is why the most popular pattern for position trading is a breakout of a ‘long base’, basically the long-term trading range.

Even though breakouts may happen on multiple time frames, they have particular importance for position traders.

Example no.1

For example, TSLA experienced quite a massive breakout of an extensive trading range in September 2021. Before taking off and moving higher, it was consolidating in a very wide range between April and October. It took six months to complete the pattern. After the breakout, TSLA's price rose by more than 50% to a new peak.

A position trading breakout of a large trading range.

Here we see a chart of the TSLA stock in October 2021 and the breakout (circled) of a large trading range. Source: Tradingview.com

Example no.2

Eli Lilly (LLY), a US pharmaceutical company, is another example of a ‘base pattern.’ Driven by strong fundamentals, it repeatedly established broad trading ranges. The third range was significantly breached in May 2023, after which LLY’s price increased by over 60%.

In the stock market, scenarios usually point towards bullish breakout market trends. However, some stocks might form a base and break downwards. Stocks can also fall, but bearish market trends usually function differently.

Bullish patterns take longer to form, giving you, the trader, plenty of time to prepare. For bearish markets, things speed up.

When making trading decisions or planning your trading strategy, you must think of a bullish market as climbing a ladder, one step at a time. In contrast, a bearish market is like falling quickly in an elevator shaft. Generally, bear markets are better for swing or day traders, but some stocks still offer opportunities to get in on a long-term bearish trend.

A base pattern position trading chart with a massive breakout

A chart of LLY stock showing the massive breakout of a base pattern in May 2023. Source: Tradingview.com

Bear patterns usually involve some classical reversal chart patterns, such as head-and-shoulders and double tops.

Example no.3

A typical bearish pattern for position trading can be seen in Intel’s stock (INTC). It formed a large head and shoulder formation that broke in June 2022. This bearish trend continued until October 2022, causing the price to drop for about four months. The stock lost over 40% of its value during this long period. For you traders, maintaining a short position could have been a good opportunity, particularly if paired with another long trade.

position trading with a head and shoulder pattern

A chart of INTC stock: a massive head and shoulder pattern was broken in June, 2022. Source: Tradingview.com

Stock trading position management

You must exercise a lot of patience while waiting for the right opportunity. However, it is equally important to manage your position properly once you have opened it, otherwise it might end up closing too quickly.

The main tools position traders rely on for position management trading strategies are stop losses and trailing stop orders.

Setting your stop loss order as a position trader

Part of a good position trading strategy is accurately identifying the entry and exit points and applying risk management tools to avoid losing money rapidly in case of sudden market and price shifts. Therefore, a key part of your position trading plan is using the stop loss tool across all your trading time frames. However, you’ll need to set your stop loss at a farther price level, meaning at a greater distance from the entry price of your position. This prevents your position from being closed due to a pullback.

Many years ago, the so-called ‘Turtle traders’ introduced a straightforward position trading plan for setting a stop loss. Mentored by Richard Dennis, a renowned commodities speculator known as the "Prince of the Pits", these position traders recommended setting the stop loss at twice the value of the Average True Range indicator reading for the daily timeframe.

Let’s assume you entered a short position for INTC back in June 2022.

The entry point for a short position was $43. The value of ATR (20) for a daily chart was $1.57. You would have placed a stop loss at $3.14 from the entry price, which would have been $46.14.

a stock trading daily chart

In the above image we have a daily chart of INTC stock from June 2022. Stop loss was placed at a double value of the ATR indicator at $46.14. Source: Tradingview.com

What happened next?

We see that after the initial decline, the price bounced back to $45, retesting the entry level. The stop loss at $46.14 was secure and protected this trade from being closed prematurely.

a chart showing a stop loss protecting a position trading position

A daily chart of INTC stock, June 2022. Stop loss, placed at $46.14, withstood the retest and successfully protected this position from being closed too early. Source: Tradingview.com

How position traders manage a trade

Position traders may find that the process varies when entering a trade.

The market movements are not always rapid or moving in one direction. Instead, market fluctuations happen with impulses and corrections. The rule of thumb here is to wait until a correctional peak is established before adjusting your stop loss to above this peak, placing your stop-loss to a distance equal to double the ATR value.

Let’s take an example from the same INTC trade we mentioned earlier. The first correctional peak was established at $38.82. You would have had to set your trailing stop order at $41.99 (double the ATR value, which was $1.36 at the time). Even though the price had established another correctional peak above the initial peak, the stop loss was not touched again.

a daily chart showing a trailing stop order that protected a position from an early close.

A daily chart of INTC stock, July 2022, shows a trailing stop order withstood a deep correction and protected the position from an early close. Source: Tradingview.com

Finally, this trade could have been closed at around $28.85 with a potential profit of $14 per share with the initial risk of $3.14 per share, which gives us almost a 5/1 profit/loss ratio.

A chart showing a position being closed by a trailing stop loss order.

A daily chart of INTC stock, October 2022. The position was closed by a trailing stop loss order. Source: Tradingview.com

Fundamental analysis of stocks trading

There are many factors to consider when trading stocks, but one key metric you must pay attention to is earnings-per-share (EPS). This metric shows a company’s ability to make money over time and increase its revenue.

Earnings per share (EPS) is a fundamental financial metric that provides valuable insights into a company's profitability and financial performance. It is a key indicator for both investors and analysts when evaluating the attractiveness of a particular stock.

Calculating earnings per share

You can calculate the EPS by dividing a company's net earnings by the total number of its outstanding shares. The formula is:

EPS = (Net Earnings / Number of Outstanding Shares)

Basically, if the company is consistently displaying rising profitability quarter-by-quarter, its stock usually goes on the buy list for hedge funds leading to increased demand for that stock.

For example, if you check the quarterly EPS forecast for TSLA stocks, you’ll see a steady growth prediction for upcoming quarters.

This doesn’t necessarily mean you should buy, but it’s a positive indicator that increases the chances of successful upward trend breakouts.

position trading earnings per stock share.

EPS quarter-by-quarter dynamics for TSLA stock in October 2023, including guidance for subsequent quarters. Source: nasdaq.com

Summing up position trading for stocks

  • Position traders may wait for long-term consolidations to be broken to enter relatively early into a trade that might last for several months.
  • Position management is crucial as markets rarely grow or decline in a straight line. Asset prices usually form a classical impulse-correction phase.
  • Position traders support their technical views with fundamental metrics such as EPS or similar, to improve the probability of success.

Frequently asked questions

The ideal stock for a strategy for position trading is a growth stock, which constantly produces stable revenue and earnings growth, and has good fundamentals and positive earnings surprises. In addition it’s better to choose stocks of a company operating in a leading industry, like tech. A prime example would be AAPL (Apple company), a leading tech stock, known for its long-term upward trend and its significant market capitalization. Besides these fundamental characteristics, a stock should display a solid technical analysis when applying technical indicators.

Trading styles are not inherently good or bad, but rather they need to match your personality. A position trading plan is not for everyone, since maintaining long positions means you may not see any profit for quite a long period of time if no market trends are present. Day trading, on the other hand, pursues a short-term performance. The crucial difference is that it’s more challenging due to high daily competition and limited profit potential. Moreover, day traders tend to be more prone to mistakes and misjudgments, as they operate under emotional pressure in a high-speed trading environment.

As a position trader, you can hold a trade for a prolonged period and let the market do the work, if you've chosen the right stock and applied the proper risk management. Your main challenge is finding the right stock and entry time.

As a position trader you would typically use daily charts. However, every trader uses their own unique combination of timeframes to fine-tune their entry point. For example, you may analyze the daily chart and enter a position with a four-hour or a one-hour chart. Despite this, the main time frame for a positional trader remains the daily chart.

When talking about position trading, we are referring to long term trend-following trading.If position traders want to follow a long-term trend, they need to find a strong one first, which means picking a solid stock with good growth potential and strong fundamentals.

Traders need to find both a suitable stock and the right time to enter. Typically, position traders look for extended trading ranges that are about to break soon. When the breakout happens, you can join the longer term trend relatively early, resulting in a favorable profit/loss ratio.

Ideally, it would be better to use a swap-free trading account when position trading, even if it costs more. Swaps might eat up a portion of your trading profit, but it’s usually not a large amount. If you hold a position for less than one or two weeks, then any trading account would fit this style of trading.

Ready to try position trading stocks?

Position trading in the stock market can be a rewarding long-term investment strategy, especially when there are large price shifts over time. As we discussed, the significant growth of TSLA in recent years presented great opportunities for position traders. With the right knowledge and strategies, you will be better equipped to benefit from these financial market trends.

Choosing the right broker

However, every investment journey is unique and having a reliable partner is crucial. This is where Mt8Pro can help. With proven expertise, we provide robust platforms and tools, as well as better-than-market trading conditions, along with protection measures to support your position trading efforts. So why wait? Start trading with Mt8Pro today and experience the excitement of the financial markets firsthand.

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This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.