Short vs Long Term Futures Trading

Whether you’re trading futures for the first time or you’re an accomplished, experienced dealer, the question that most frequently rears its head when deciding whether to invest in a particular instrument is whether or not to do so for the long or the short term. Depending on the market, the asset class and your research into the particular futures contract you are consider trading in, there may be one option that appears more or less suitable.

Indeed, depending on the nature of your overarching trading style, you may be reluctant to adopt a particular approach in either direction if it contrasts with how you normally trade, and this can be a significant barrier to choosing the most rational trading approach for a given instrument. Both long and short-term trading strategies are uniquely advantageous in certain circumstances, and a calculus of how these different styles compare is worthwhile in determining which best suits your trading situation.

Short Term Advantages

When it comes to trading anything with leverage, short-term approaches are often easier to implement than long-term approaches, for several key reasons. While they may prove easier, it is also normally the case that short-term trading requires more work and engagement with your trading account, and any insulation from significant risk must be met with corresponding difficulties.

Firstly, short-term trading allows traders to hold up on their exposure to risk, simply because positions aren’t usually open long enough to encounter any serious damage. Of course, this simultaneously means individual transactions tend to be less profitable when they go well, but especially for new and inexperienced traders, the lower risk profile makes short-term trading seem much more worthwhile.

Likewise, with short-term futures trading strategies, you’re not so concerned with wider market and economic data – moreover, simply by understanding the immediate trend of asset prices, it is possible to profit by trading on a combination of technical analysis and common sense. If a share price is recovering from a slump, buy it. If oil prices are falling from a record high, sell it. With the benefits of leverage on your side, this can make short-term a trading a no-brainer, and is perhaps one of the most basic ways to start grinding out a return from futures trading.

Long Term Advantages

Long term trading, while perhaps more difficult to accurately predict, protects traders from market volatility and opens the door to much more profitable trades, and much less trader input. It stands to reason that a short-term trader gunning for smaller returns will be required to source a greater number of trades in order to make the same kind of money as they would on larger, more long-term trades. This means an increased research burden and more time spent at the trading desk, often for the same or less reward. For this reason, many professional traders soon switch away from short-term trading, with a view to executing more precise but much longer-term positions.

But the real biggie when it comes to advantages on the side of long-term futures trading is the transaction cost. Brokers almost always charge a commission on the size of each transaction, as part of their charging structure and revenue model.

Some traders fall for the fallacy that because this portion is often expressed as part of the overall profit or loss calculus that it barely matters – in effect, that the bottom line is all that counts. That couldn’t be further from the truth, and this form of disguising trading costs works a treat for many short-term traders. A crucial advantage with trading less frequently is that it is less expensive, in the sense that broker fees are reduced.

While on an incremental basis this might seem like a negligible cost, these charges can quickly mount up over time, especially with ultra short term trading strategies, effectively handicapping the trader and his chances of success. Long term trading allows you to be more sparing in the positions you adopt, saving you both the research time and the transactional costs incurred on a per-trade investment.

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