Short-term versus long-term holding is a question that every investor has to work through. Often the answer will come down to a mix of personal preference, risk management choices and profit expectations, and the result will indicate what type of markets, investments and trades would be most suitable. As contract for difference (CFD) trading is still a relative newcomer to the world of financial trading instruments, whether or not they are only suitable for short-term trading is a common query.
In fact, CFDs are a powerful tool whatever trading strategy is determined and their in-built flexibility means that they are suited to both short- and longer-term trades. This might go against a certain perception that CFDs should not be used to hold a position in a market for a long time, but that is often down to the idea that interest is charged on the amount of the contract if you take a long position. Although this can be a valid point to make, and a continual maintenance charge might not seem to be a good idea on a long-term holding position, if the expense is factored into a profit calculation correctly, it can mean that it turns a successful trade.
As CFD is a leveraged product, taking a long position that turns out to be the right choice can, in fact, offer handsome profits at the end of the trade. If only 10% of the value is needed to open the position and it goes up only 1% a month that obviously adds up to 12% over a year, even without compounding of any kind. That would more that cover the interest, offer a gain of 3% of the value of the underlying asset after interest, and make 30% profit in the year on an initial investment of 10%.
This shows that long-term objectives can be facilitated through using CFDs, especially in an environment such as the current one where interest rates are low. As long as costs and all payback considerations are built into the calculations for the trade, there is no reason why it can’t make sound financial sense.
Stop loss orders
Another built-in advantage that CFDs have over other forms of derivative trading when it comes to taking longer-term positions are stop loss orders. By setting up an automated point where losses can be mitigated by closing the position, a fall back safety net can easily be put in place. Any experienced trader will know that chasing losses and holding on to a losing position in the hope of a turnaround or on the basis of a hunch can be economically fatal. By using this aspect of CFDs, the possibility of catastrophic losses can all but be ruled out.
Short term and long-term traders usually have a very different outlook to each other and will consequently use different trading methodologies. Looking for trends over longer periods is quite a separate discipline than riding the shorter-term waves that might occur over a day, hours, minutes or even seconds. Although many CFD traders tend to be of the ‘hands-on’ variety and are therefore drawn towards the fast pace markets with quick turnarounds, this doesn’t mean that consideration for a longer-term position can’t also have its own part to play.
Technical analysis is well suited to interpreting data related to short-term influencing factors, whereas fundamental analysis methods have been tried and tested for success in making longer-term investments. A short-term trader will also give more importance to other forms of analysis and data gathering such as a news-based approach.
CFDs offer a great deal of flexibility in everything from the wide range of markets available, the underlying assets that can be used as a basis for trade, the number of platforms and brokers there to be used, and the fact that as a leveraged product, getting started can be far easier than with other forms of trading.
Although many active traders will be looking for short-term opportunities and will not need to pay too much attention to calculating profits against offsetting interest charges, that doesn’t mean that longer-term positions are at odds with the concept of CFDs. The risk/reward ratio, trading capital and time and effort that a trader is able to put into the project all factor into which markets will be best suited and what length of positions could be feasibly profitable. As everyone will have different circumstances and a unique mix of options available to them, it is impossible to answer the question ‘is long-term trading suited for CFDs’ with a one size fits all response.