Long and Short in Trading: The Basics Every Seller Needs to Know

The Difference Between Long Position and Short Position

When the market is volatile, the signals of your trading activity, Long and Short, are key terms that need to be understood. These terms are not used in all trading instruments but are prominent in instruments such as Derivatives, Futures, CFDs, and Forex, which involve selling assets with the potential to profit from price declines.

Taking a Long Position means you are placing a “buy order” for an asset when you expect its price to rise. This strategy aims to profit from an upward movement — buy low and sell high.

Taking a Short Position means you are placing a “sell order” for an asset when you expect its price to fall. This strategy aims to profit from a downward movement — sell high and buy back lower.

How the Long Position Works in Selling Assets

In a long position, traders buy assets such as currencies or commodities expecting their value to increase. For example: buying at 41 units, anticipating the price will go up. When the price rises to 42 units, the trader sells to realize a profit of 1 unit.

If the price drops instead, the trader incurs a loss. For example: buying at 41 units but selling at 40 units results in a loss of 1 unit.

How the Short Position Works in Selling Assets

A short position allows traders to profit from a decline in asset prices by selling assets they do not own initially. For example: selling at 41 units, expecting the price to fall. When the price drops to 40 units, the trader buys back to realize a profit of 1 unit.

If the price rises instead, the trader faces a loss. For example: selling at 41 units but buying back at 42 units results in a loss of 1 unit. Short positions are not available on all instruments but are prominent in Derivatives, Futures, CFDs, and Forex. Selling assets must be checked whether short selling is permitted on the platform.

Global Example: Long Position in Stock Trading

Scenario: Tim hears that PEAR stocks will increase in value because of a buy signal. He wants to buy 100 shares of PEAR at $350 each, totaling $35,000.

If the stock price rises to $400, his profit is calculated as: 100 shares × ($400 - $350) = $5,000.

Global Example: Short Position in Stock Trading

Scenario: Tim hears that ORANGE stocks will decline. He initially sells at $350, receiving $35,000 in proceeds. Later, he buys back the shares at $300, spending $30,000, to close the position and realize a profit of $5,000 ($35,000 - $30,000).

In other types of trading, short positions involve selling assets you do not own initially and buying them back later at a lower price to profit from the decline.

Long and Short: Key Strategies in Modern Asset Trading

Understanding the detailed mechanics of Long and Short positions is essential for effective trading. Instruments like CFDs allow traders to take short positions easily, enabling profit from both rising and falling markets. However, engaging in short selling requires good risk management and thorough understanding of the mechanics involved in Long and Short positions.