CFD Holding Strategies: From Short-Term to Long-Term

When it comes to contracts for difference (CFDs), traders often wonder how long to hold them. Unlike some financial instruments, CFDs do not have a specific expiry date, giving traders the freedom to choose their trading strategies. However, the holding period of a derivative affects both trading costs and profitability.

What are contracts for difference (CFDs)?

Traders use CFDs to make speculative bets on the price movements of various financial instruments without owning the assets themselves. They can choose to go long (buy) or short (sell) depending on their prediction of the direction of price movements. This flexibility allows traders to profit from derivatives.

Duration of CFD ownership

One of the attractions of derivatives is their flexibility in terms of holding period. Traders can hold positions for both short and long periods of time, depending on their trading strategies and outlook for the market.

Short-term CFD traders

Short-term horizon traders, also known as day traders or intraday traders, may hold assets for a few minutes or even a few hours. They seek to capitalise on small price fluctuations during a single trading session, often closing all their positions by the end of the trading day to avoid additional costs and risks, especially in more volatile markets.

Famous Day Traders

Some of the most famous day traders of our time, whose names have become legendary for their ability to profit from short-term market movements, include Paul Tudor Jones, George Soros and Jesse Livermore. They often relied on technical analysis, chart analysis and market indicators to identify short-term trading opportunities and make quick trades for instant profits.

Swing traders

Unlike day traders, swing traders focus on trading over several days or weeks, aiming to catch short and medium-term price movements in the market. They actively study technical indicators, chart patterns and market sentiment to determine entry and exit points to capture significant price swings.

Famous swing traders

Famous swing traders include legendary investors such as George Soros, who has made successful trades including the decline of the British pound sterling thanks to his strategies, and Stanley Druckenmiller, who is a former manager of the Quantum Fund and specialises in recognising trading opportunities and managing risk. Paul Tudor Jones, known for his profitable trades during the 1987 stock market crash, and Larry Williams, who became a world champion futures trader, are also known as experienced swing traders. Mark Minervini, an author and successful trader who has achieved impressive results in the stock market, has also become famous for his swing trading approaches, including discipline and risk management.

Long-term traders

Investors who prefer long-term strategies, also known as position traders, analyse the market over a longer period of time, holding their derivatives positions for days, weeks, months or even years. They often focus on fundamental analysis, evaluating economic indicators, company financial results and geopolitical events to determine whether a particular asset is undervalued or overvalued and use this information for their long-term investments.

Famous long-term traders

Warren Buffett, known as the "Oracle of Omaha," distinguishes himself as a successful investor and chairman of Berkshire Hathaway by investing in companies with strong competitive advantages and holding them over the years, following the principles of patience and value investing. Peter Lynch, who managed the Fidelity Magellan Fund, follows a "buy what you know" strategy, focusing on companies with whose products or services he is familiar and maintaining full research and long-term share ownership. Benjamin Graham, known as the "father of value investing", introduced a long-term investing tactic based on buying stocks below their intrinsic value and holding them for the long term, inspiring many investors with his classic book The Intelligent Investor.

CFD costs

When it comes to long-term stock investing, derivatives offer flexibility, but it's important to consider their costs. For example, holding an overnight derivatives position often comes with financial fees known as overnight commissions or swap rates. These fees accrue over the life of the position being held and can vary depending on factors such as the size of the position and current interest rates.

CFD spreads

In addition to considering closing rates, traders should consider the spread - the difference between the buy (ask) and sell (bid) prices of CFDs. This factor can have an impact on opening and closing costs, especially for scalpers who open and close positions frequently. The cost of overnight commissions and spreads can eat up all profits, so it is important to take them into account when trading.

Ultimately, the decision on how long to hold positions is left to the trader, who must consider market conditions, their financial goals, risk tolerance and other factors. Developing a good trading plan and thinking carefully about all aspects will help a trader achieve success.