Position Trading vs Trend Following
Position trading is a holding period of months to years and says nothing about why you entered or how you leave. Trend following is an exit rule that holds while a move continues, which needs a long holding period to work — so one supplies what the other requires.
Most duration-and-edge pairings on this site are optional combinations. This one is close to compulsory in one direction: trend following needs a long holding period, and position trading is what a long holding period is called.
What each one is
Position trading is a holding period of months to years. It says nothing about entries or exits. Position trading covers it.
Trend following is an exit rule: hold while the move continues, leave on a trailing stop, accept that the top is never captured. Trend following covers it, and swing trading covers the shorter holding period it sits awkwardly on.
One is a constraint and the other needs it lifted. Whereas most exit rules work at any horizon, this one has a measurable minimum, and below it the method keeps its name and loses its behaviour.
Where they differ
What each decides. The holding period sets your horizon and your relationship with the position. The exit rule sets what actually ends it, and you can hold for months and still exit on a fixed target — most people who call themselves position traders do.
How much room the rule needs. On this site’s shared series a trailing stop survived a median of 3, 10, 22 and 32 bars at one, two, three and four average true ranges, across 562 trials. Those four numbers are the entire specification: the trail distance you pick is the holding period you get.
What each costs you. A long holding period costs the annual drag — over thirty years, 75 basis points removes 20.2% of the final pot and 150 removes 36.5%. A trailing exit costs the end of every move. Those are unrelated costs and both apply.
Which one you can change. The exit rule is a setting. The holding period is largely a fact about your life and your capital, which is why it is usually the constraint and the exit is fitted to it.
Where they agree
Neither supplies an entry. Both describe what happens around a trade rather than why to take it.
Both need markets that occasionally trend. Without large moves the long hold produces nothing and the trail produces a string of stops.
Both live through drawdown. On this series 95% of bars sat below a prior peak, the worst was 3.76% and the longest wait for a new high was 73 bars, which finished 3.61% up.
And both are indifferent to the round trip. At 0.0098 against a target measured in many bar ranges, execution cost is not the variable that matters at this end of the axis.
Which one to use
Use them together, which is what the numbers point at. A four-average-true-range trail with a months-long horizon is the configuration that produced the 32-bar median here, and it is the one the documented results come from.
Use a fixed target instead when you need a predictable hit rate. A long holding period is perfectly compatible with a target, and if strings of small losses would stop you following the plan, that is a real reason rather than a weakness.
Use the widest trail your capital tolerates when you do trail. The survival figures rise steeply with distance, and a trail chosen for comfort rather than for the market is usually too tight.
And when the instrument does not produce large moves, use neither. The pairing’s entire return comes from occasional outliers, and an instrument that has none is one where the arithmetic never closes.
Why the trail distance is the holding period
Because they are not two decisions. Setting a one-average-true-range trail is choosing a median hold of three bars whatever you intended, and setting four is choosing thirty-two. You cannot select a duration and a trail independently; picking either has already picked the other.
And because average true range moves. Its median here is 0.5994 and its ninetieth percentile 0.7954, so a trail in those units tightens in quiet markets and widens in busy ones — usually the right way round, and worth knowing it happens without you.
The original data
Of the 24,971 unique videos in the search corpus, no title compares these two directly. Trend following appears in 116 titles at a median of 3,608 views across 91 channels. Position trading appears in 48, at a median of 3,115 across 40.
The two smallest audiences of any styles measured here. These are the least-watched subjects in the whole style group and between them they describe the approach with the best-documented long-run evidence — a mismatch that recurs throughout this corpus and is worth weighing against any judgement made from how much material exists.
On the chart above holding is the method and it will feel wrong every time. The give-back is not a failure of the trail, it is the price of the trades where price never came back.
When it fails
The characteristic failure is tightening the trail after a painful give-back. A large winner retraces, a lot of open profit disappears, and the trail is moved closer so it cannot happen again — which takes the median holding period from 32 bars to 10 or 3 depending on how far it moves, and removes the long winners the strategy’s entire return depends on. What remains has trend following’s poor hit rate and a target-based method’s capped upside, which is the worst combination available, and it arrives through a sequence of individually reasonable adjustments.
A second failure is running the exit rule on a short holding period, where three bars is not a trend.
A third is ignoring the annual drag, which removes 20.2% of a thirty-year pot at 75 basis points regardless of how well the exit works.
A fourth is judging the pairing on a sample with no large winner in it, which removes the source of its return and leaves only the losses.
And a fifth is abandoning it during the wait. The longest stretch below a prior peak here was 73 bars, and that period is indistinguishable from a broken method while you are inside it.
Related
Position trading covers the long holding period. Trend following covers the trailing exit rule. And swing trading covers the shorter horizon the rule fits badly.
The reason trend following is associated with long holding periods is not tradition, it is that the trail distance and the holding period are the same variable. Choosing how much room to give is choosing how long you will be in, and the numbers make that explicit.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.