Long Term CFD Trading Strategies
Conventional wisdom in CFD trading suggests that short term transacting is the best policy, holding open positions for a day or two at the most to counteract the bite of financing costs. Long term trading strategies have long been regarded as the preserve of less highly leveraged trading styles, and tend to go hand in hand with less volatile markets. But is that necessarily a rule to which you must adhere as a CFD trader?
Some CFD trading strategies are in fact designed for those with a longer-term view, and while financing costs are no-doubt an issue that must be borne in mind at all times when dealing with margined investments, they don't necessarily cancel out the profit potential from a given CFD position.
Take the example of a property developer investing in an office complex. Chances are, the developer will be funded by a bank in order to make the deal happen, and the costs of providing this finance (itself a form of leverage) will accrue over the lifetime of the investment. The developer will of course be required to account for the interest costs and factor in repayments to his financial calculations, but this doesn't necessarily mean it's impossible to generate a profit from the transaction. The same is true with holding contracts for difference over the long term.
People don't tend to invest in CFDs, preferring instead to trade them on a quick, short-term basis. But longer-term investment actually have their advantages. One of these core advantages is the ability to ride larger price movements - a door that is abruptly shut to those engaging in shorter term strategies.
Price movements over the course of one day are usually restricted, and it is a rare occurrence the prices will move drastically - even in volatile markets. Contrast that with the potential movements in price that can take place over the course of a couple of months, where serious price rises can make savvy traders serious money - interest costs and all.
Furthermore, the cost of transacting with longer term CFD trading strategies is significantly lower than it is with day trading and other shorter-term outlooks. Because day traders engage in multiple short-lifespan trades, they incur the costs of broker fees and commissions on a much more frequent basis than their longer-term counterparts, and this is a cost that can have a serious impact on your trading bottom line. While it is true to say that longer-term positions generally expose your trading account to greater risk, this can be tempered with lower per-transaction costs, and provided you do your homework, can be an equally, if not more profitable investment approach than going the short term route.
Long term trading strategies are far from the norm in CFD trading, but that's not to say they are in complete isolation either. Traders who employ long term CFD trading strategies understand that they must bear the brunt of the additional costs, but by striving to stake out for much larger profits, it is hoped that the rising value of open CFD positions will more than cancel out financing costs to deliver a healthy profit over time.