How long should you hold a CFD?

When it comes to Contracts for Difference (CFDs), one of the most common questions among traders is how long do you hold a CFD? Unlike some financial instruments, CFDs do not have a fixed expiry date and therefore traders can use different trading strategies at their will. Nevertheless, the period that you keep a derivative will affect both your trading costs and your profitability.

What are Contracts for Difference (CFD)?

Traders utilise CFDs to speculate on the price movements of different financial instruments without owning the underlying asset. You can either decide to go long or short, depending on whether you think the price will rise or drop. This flexibility gives you the potential to make profits through derivatives.

CFD Holding duration

One of the appealing aspects of derivatives is their flexibility in terms of how long you can hold them. Traders have the liberty to hold trades for a short time as well as over a long period of time, depending on the trading objectives and market outlook.

Short-term CFD traders

Traders with a short-term horizon, also known as day traders or intraday traders, may hold assets for as little as a few minutes or a few hours. Day traders try to benefit from the slight price fluctuation within only one trading session, usually unwinding (closing) all positions by the end of the trading day to avoid carrying over expenses and risk more volatile markets.

Famous day traders

The most celebrated day traders of our time who made a name for themselves by profiting from short-term market movements include the likes of Paul Tudor Jones, George Soros, and Jesse Livermore. Traders mostly use technical analysis, chart patterns, and market indicators in order to find short-term trading opportunities and carry out high-speed trades for instant profits.

Swing traders

Contrary to day traders, swing traders tend to trade for several days to weeks looking for short to medium-term price moves. Such traders study technical indicators, chart patterns, and market sentiment in order to identify the moment for entering the market and the exit points in order to capture larger price swings.

Famous swing traders

George Soros:

George Soros is renowned as one of the greatest investors of all time and made a legendary trade in 1992 by shorting the British pound which earned him over a billion dollars of profit. Soros is often revered as a superb forecaster and a swing trader who uses a combination of fundamental and macroeconomic indicators and technical analysis to speculate on the overall market direction and make his strategic trades.

Stanley Druckenmiller:

Frequently called Soros’s alter ego, Stanley Druckenmiller is the second legendary investor in the world who has been a champion of swing trading. Druckenmiller led the Quantum Fund of Soros and played a great part in the execution of the deals that generated the astronomical profits during the British pound trade. He is well-known for his skill to discern high-probability trade setups and manage this risk efficiently.

Paul Tudor Jones:

A notable hedge fund manager and philanthropist, Paul Tudor Jones became known for his profitable trades during the 1987 stock market crash, where he claimed to have earned a triple-digit return by going short. Jones is a well-known macro economic trader who employs a swing trading approach. This involves identifying major economic trends and market cycles in order to spot swing trading opportunities in different assets.

Larry Williams:

An eminent trader, author and educator, Larry Williams has made a lot of contributions in the area of swing trading. He is best known for winning the Robbins World Cup Championship of Futures Trading in 1987, turning his $10,000 into over $1 million in less than a year. Williams is highly regarded for his mastery of technical analysis and inventing trading systems built on price patterns and market cycles.

Mark Minervini:

Mark Minervini is a renowned swing trader and author who has had an impressive performance in the stock market. In 1997, he defeated all other participants in the U.S. Investing Championship with an unbelievable 155% annual return. Discipline, patience, and risk management are the three pillars of Minervini’s swing trading approach.

Long-term traders

Long-term traders, often named position traders or investors, take a much longer-term view of the market compared to day traders and hold derivatives positions for days, weeks, months or, perhaps, years. These traders frequently make their decisions based on fundamental analysis, evaluating factors like economic indicators, corporate earnings, and geopolitical events to determine if a particular asset is under or overvalued so that it can be further used for long-term investment.

Famous long-term traders

Warren Buffett: Named “Oracle of Omaha,” Warren Buffett is one of the most successful investors of all time. While the chairman and CEO of Berkshire Hathaway, Buffett made a fortune by investing in undervalued companies with strong competitive edge and holding them for long term. He focuses on such investment principles as patience and discipline as well as value investing.

Peter Lynch: Peter Lynch became known for being the manager of the Fidelity Magellan Fund, a fund that produced extraordinary returns for investors. Lynch supports a “buy what you know” strategy, an approach that encourages investors to pick companies whose products or services they are familiar with. He is a strong proponent of doing a complete research and keeping investments for long term.

Benjamin Graham: Frequently called “the father of value investing,” Benjamin Graham pioneered long-term investing tactics. His book “The Intelligent Investor” is a classic of the investment field and has guided countless generations of investors. Graham’s approach consists of buying stocks below their intrinsic value and holding them for a long period.

CFD Costs

When it comes to the duration of holding, derivatives offer flexibility, but it is significantly important to acknowledge the cost implications. An overnight derivatives position is usually subject to financing charges which are commonly referred to as overnight fees or swap rates. These charges are applied for the duration of the position held, which can change based on factors including the size of the position and the current interest rates.

CFD Spreads

In connection to the closing rates, traders ought to take into consideration the spread as well which is the gap between the buying (ask) and selling (bid) prices of a CFD. It can determine the cost of opening and closing a position by traders, especially those who tend to frequently open and close their positions (scalpers in margin trading).

The cost of overnight fees and spreads can eat through your profits so it is important to fully comprehend and factor them in while trading.

Finally, it is a matter of whether the trader chooses to maintain their derivatives positions for whatever period they feel satisfied, provided the market conditions, trading goal, risk tolerance and different costs are considered. Traders have to consider these issues carefully, and they need to design a good trading plan to employ derivatives trading strategies in order to achieve their financial objectives.

If you are starting now in CFD trading and wondering what type of trading suits you better, head over to our website for a wealth of resources, educational eBooks, expert webinars and informative articles. Our experts’ insights will provide you with the necessary info to help you get started.

Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked in this communication.