Position Trading and Trend Following

Position trading captures major market trends over weeks to months. It requires patience but can generate significant returns with minimal time commitment. [DEFINITION] Position Trading: A long-term trading approach holding positions for weeks to months to capture major market trends. ### Position Trading Characteristics - Trades major trends, not minor swings - Uses weekly and monthly charts - Few trades per year (5-15 typically) - Ignores short-term noise - Rides winners, cuts losers quickly [TIP] Position trading suits investors who want better returns than buy-and-hold while still having a life outside the markets. ### Trend Following Principles [KEY] "The trend is your friend until the end." Trend followers don't predict turns—they react to them. They're late to enter and late to exit, but capture the middle of major moves. **Trend following rules:** 1. Buy new highs (counterintuitive but effective) 2. Use trailing stops 3. Never add to losing positions 4. Let winners run ### Entry Strategies **Moving Average Cross:** - Buy when 50-day crosses above 200-day (Golden Cross) - Sell when 50-day crosses below 200-day (Death Cross) **Channel Breakout:** - Buy when price breaks above 52-week high - Sell when price breaks below 10-week low [EXAMPLE] Stock breaks out above its 52-week high at $80. Position trader enters at $82. Sets trailing stop at 20-week low ($70). Rides trend to $130 over 6 months. Stop rises to $110. Eventually stopped out at $115. Profit: $33/share (40%). ### Famous Trend Followers **Richard Dennis:** Turned $5,000 into $100+ million **Ed Seykota:** Averaged 60%+ annual returns **Bill Dunn:** Managed billions with trend following They all share key traits: - Strict risk management - Diversified across markets - Patience through drawdowns ### The Psychology of Trend Following [WARNING] Trend following is psychologically difficult: - You buy after a stock already rose (feels like chasing) - You sell after it already fell (feels late) - You give back profits before exiting (painful) - Many small losses before one big winner **Win rate typically 30-40%, but winners are 3-10x larger than losers.** ### Position Sizing in Trend Following **Volatility-based sizing:** [FORMULA] Position Size = (Account × Risk%) ÷ (ATR × Multiplier) This automatically sizes smaller positions in volatile assets and larger in calm ones. [EXERCISE] A stock is in a confirmed uptrend, trading at an all-time high of $100. Your trend-following system signals a buy. Many investors are scared to buy at highs. Why might buying here make sense? |ANSWER| Trend followers buy breakouts because all-time highs mean no one is underwater—there's no overhead resistance from trapped buyers wanting to exit at breakeven. Stocks hitting new highs tend to continue higher. The trend is confirmed, not predicted. [SCENARIO] You entered a position trade at $50. The stock rose to $80, then pulled back to $65 (your trailing stop was at $55). It's now rallying again toward $75. Some traders would feel regret for not selling at $80. How should you think about this? You followed your system. The stop didn't hit, so you're still in a winning trade. The pullback was normal. If your system is profitable long-term, following it consistently matters more than optimizing any single trade. Taking profits early would have violated your rules and potentially caused you to miss further upside.