If you come from a traditional trading background and are thinking about trading CFDs, then position trading is probably not the first thing that comes to mind. Conventional wisdom is that CFDs, with their margin requirements and interest payments, shouldn't be used for long-term investments. But if you're careful with your trades, you may find that contracts for difference work well in this context.
Firstly, let's define what is meant by position trading. Some people get confused at the mention of position, and go on to believe that position trading is about changing your position size in a trade, or some other aspect of position sizing. Position sizing is very important, and must be done in the context of expected risk/reward and the size of your account. Position trading, on the other hand, is defined as a long-term style of trading where your position in a trade can be held from several days to many months.
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Most long-term investors could relate to position trading, which embraces buy and hold philosophies, but the idea of trading engenders the thought that there is more attention paid to where your money is at work, and to changing the trade if it is not performing to expectations. This is exactly the attitude that you should have if you are considering position trading with CFDs.
Position trading, with whatever type of financial instrument, is based on identifying long-term trends and taking a position to make a profit from them. Depending on the underlying security, this might involve some fundamental analysis as well as using technical analysis to determine the entry and exit points. Once you identified a strong and steady trend, it is a simple matter to use CFDs to take a long or short position in the direction of the trend, and to enjoy the gearing of your investment that CFDs provide.
One reason given for not using CFDs in long-term trading is that they are a margined product, and hence have interest charged for the length of time you hold the investment. However, being aware of this and incorporating it into your trading plan can still lead you to a profitable outcome. Even though you are paying daily interest while you hold the position, if you invest in a strongly trending stock the increase in value will more than counter that interest payment.
The other factor in favor of a CFD is that it is leveraged, therefore your initial investment is less, or you can profit from a greater holding. Typically, you may place only 10% as an initial margin, whereas if you were to buy the stocks your broker would demand 50% margin.
Of course, the picture gets much better if you can identify a strongly downtrending financial asset. In this case, when you trade a contract for difference on the short side you are paid interest daily. The interest paid is not a great deal, but going short with a CFD immediately disposes of the argument that it is too expensive in interest to take long-term trades with CFDs. So CFDs are worth a second look for your long-term goals as well as for short-term trading.
