The positional trading strategy has made the top 25 highest-earning hedge fund managers to generate a whopping $17 billion in profits in 2017. If you want to trade like a Hedge Fund manager, you need to learn how to profit from the long-term trends.
If you decide that long-term trading matches your personality, there are a few things you need to be psychologically prepared for. When holding positions for a long time, it’s certain that the market will move against your trade at some point. In this situation, you need to have the conviction to stick to the rules no matter what.
When you are analyzing the charts, you’re actually analyzing the mass psychology. The behavior of the crowds has not changed because fear and greed are human emotions that remain the same.
Mass psychology plays an extremely important role for successful traders, and position trading is the best way you can take advantage of the financial market psychology. You can also read our best fractal trading strategy.
Let’s first start to try and understand what is positional trading, and outline what is the best positional trading strategy.
The good news is that these positional trading indicators work across all asset classes and also across different time frames.
What is Position Trading?
Position trading involves holding trades for weeks, months or even years. In other words, position trading is another form of investing where people hold their positions long-term with the expectation they will become profitable.
While investing exclusively refers to going long, position trading can also embrace selling. This makes positioning trading more suitable for trading any type of market (stocks, bonds, commodities, Forex, cryptocurrency) because it allows you to be both long and short.
Studying the fundamentals of the market, you’re about to trade can help you better understand the long-term trends, however, by using our proprietary positional trading indicators you won’t need to be concerned with fundamental analysis.
Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules of this entry method.
For this article, we’re going to look at the buy side.
Note* When trading long-term, you can’t go lower than the daily chart.
Positional Trading Strategy
In this section, we’re going to explain what is the best positional trading strategy and how you can capture the long-term trend. Our long-term strategy does use some of the best positional trading indicators because this will help us better timing the market.
We are going to use the following positional trading indicators:
- 200-day EMA
- 50-day EMA
- Stochastic RSI
The 50-day and 200-day exponential moving averages are regarded to be the most powerful moving averages for position trading. These two moving averages can be used to time the overall market trend by simply studying the MA crossover.
When the short-term moving average – 50-day MA, crosses above the long-term moving average – 200-day MA indicates a bull market going forward. This also refers to as being the golden cross.
Inversely, when the short-term moving average – 50-day MA, crosses below the long-term moving average – 200-day MA indicates a bear market going forward. This also refers to as being the death cross.
This combination of technical indicators between a moving average and the Stochastic RSI indicator works because the oscillator is comparing the closing price to its price range over a certain period of time.
This combination of positional trading indicators is highly productive if used to its fullest potential.
Note* In order for this positional trading system to work we need to use some special settings for the Stochastic RSI indicator (%K=200; %D=50).
We can’t reveal the secret behind this fixed stochastic setting. We have shown you enough so you can have a better chance of riding the long-term trends.
Step #1: Wait for the Stochastic RSI to develop a crossover below the 20 level
Moving averages are lagging an indicator which means that by the time a moving average crossover happens the trend has already been put in motion and you might be missing a good portion of that trend.
Besides this, you also have to use quite a large stop loss when trading moving average crossover system.
The solution to this crossover flaw is to use the Stochastic RSI indicator with our special settings. Basically, the Stochastic RSI’s moving average will signal a golden crossover before the moving average crosses over, which can give us a tremendous advantage getting into a trend earlier.
The first signal that a bullish trend is about to start is when the Stochastic RSI produces a crossover below the 20 level.
But, since all technical indicators are prone to false signals, we have another confirmation signal that needs to be satisfied before pulling the trigger.
Step #2: Buy when the Price breaks and close above the 200-day EMA
The 200-day exponential moving average is regarded to be one of the most powerfully moving average and positional trading indicators to determine the direction of the trend. When the price of any given market is trading above the 200-day EMA, that’s considered by the most technicians to be a bullish signal.
It’s smart to assume that once we break above the 200-day EMA a bullish trend will emerge.
We buy at the market only after we have a closing price above the 200-day EMA, which confirms the breakout.
Now, if we had waited for the golden cross, we would have missed a good portion of the trend.
Please, see below the different entry strategies and see by yourself how superior our positional trading strategy is:
This brings us to the next important thing that we need to establish for our long-term trading strategy, which is where to place our protective stop loss.
Step #3: Place your protective Stop Loss below the most recent swing low
We have tested many different strategies to protect our hard earned money, and when trading long-term trends, we’ve found out that the most convenient way to hide your protective stop loss is below the most recent swing low.
Our stop loss strategy will accomplish two things:
- First, it will give the long-term trend enough room to breathe.
- Secondly, it uses the price points on the chart which signal a change in the price structure and subsequently a possible change in the trend. And when this happens, we want to be out of the trade.
Last but not least, we also need to define where we take profits when trading with the trend.
Step #4: Take profit when the Stochastic RSI crossover happens above the 80 level and when the price breaks and closes below the 50-day EMA.
Two trading conditions need to be satisfied when taking profits.
First, we use again the Stochastic RSI, because it gives us an earlier signal of an imminent change in trend direction. In this case, we look for a crossover to happen above the 80 level or in other words when we are overbought.
However, we need a second confirmation from the price which needs this time to break below the 50-day EMA as well. Waiting for the death crossover to happen will be detrimental to your PnL, because you’ll give back to the market some of your profits, which we want to avoid.
Position traders are also referred to as “buy and hold” traders because they hold onto their trades for weeks, months and possibly even years.
Note** the above was an example of a BUY trade using our long-term trading strategy. Use the same rules for a SELL trade – but in reverse. In the figure below, you can see an actual SELL trade example.
Conclusion – Positional Trading Strategy
When you use our positional trading strategy the expectation of making great profits can increase considerably. But, to be a successful trader, position trading requires a lot of patience and discipline and not get panicked by short-term market moves.
So, if you’re super-patient, and if you use the right positional trading indicators you can consider yourself lucky because you have all you need to trade long-term.
Warren Buffet, the world’s greatest money maker, understood that the key to successful long-term investing is simply leaving your positions alone and do nothing. Nothing on the planet earth can produce wealth like capturing a long-term trend and use the power of compounding.
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