What's the difference between Long and Short Positions?
With CFDs and FX trading you can take a view that a market will go up (buying) or go down (selling). When you buy, it is known as ‘going Long’. When you sell, it is called ‘going Short’, as in that you are short of shares. These terms derive from traditional stock market trading and when trading CFD’s, the same terms apply.
- Buy (entering a long position)
- This is when you buy something at a price with an intention to sell it at a higher price. This is typically how traditional stock market trading works.
- Sell (entering a Short position)
- This is when you sell something at the market price with the intention to buy it back at a lower price. This means you can make a profit even when markets are going down.
Going long and short in trading can be seen as two sides of the same coin. Going long or short is how you trade the coin, the asset, in this metaphor. Therefore, you’re still trading when you take a long or a short position, but the way you’re going it is slightly different.
What is the Difference Between Long and Short Trading?
Now we’ve established our foundation, let’s define what we mean by long and short position trading:
- A long position You buy an asset and hold it intending to make a profit when its value increases.
- A short position You “borrow” an asset and sell it. You then wait for its value to drop so you can buy it back at a better price before you give it back to the lender i.e. the person/company that initially allowed you to borrow the asset.
Long vs. Short Trading
As you can see, long and short position trading allows you to make a profit when the value of an asset increases or decreases. Taking a long position allows you to make a profit when the asset’s value goes up from the point you bought it, while a short position gives you the chance to profit when its value falls. To be even more technical, when we’re discussing long vs. short trading, we can say that each one requires you to start with a different position. Long trading begins with a purchase. Short trading begins with a sale. Because of this, “buy” can be used interchangeably with “long” i.e. you’re buying the asset. Conversely, “sell” can be used interchangeably with “short” i.e. you’re selling the asset.
Let’s look at an example
If you think that shares in Apple will go up in price, you would buy shares in the company. This is known as a ‘buy’ or ‘Long position’. If the share price goes up, you can then sell them and make a profit.
On the other hand, if you think the share price will go down, you can ‘sell’ or enter a ‘Short position’ (even you do not own any shares in the company). If the price does go down, then you can close the position at a lower price and make a profit.
This flexibility gives you the power to profit no matter whether the markets are going up or down. It also gives you the ability to manage your risks.
Long and Short Position Examples
Taking a long position is relatively easy to understand because it mirrors what we do in everyday life. For example, if you buy a house and hold onto it for 10 years, you’d hope to sell it for more than you paid.
Short positions are less intuitive because you’re selling something before you own it. However, the important point to remember here is that you’re being loaned something on the premise that you’ll return the asset at a later date. Doing this gives you the ability to sell the asset you’ve loaned. You could think of this like selling a friend’s car.
A friend lends you their car. You sell it and keep hold of the money. Then, due to market factors, the value of the car drops. You buy it back and return it to your friend. The difference between the money you sold the car and bought it back for is your profit. So, if you initially sold it for £2,000 and bought it back for £1,500, you’ve made £500. This is very similar to short trading forex, shares, indices and commodities such as gold.
With this in mind, let’s take our everyday examples and turn them into potential long and short trading positions on some of the instruments available at Skilling.
Long Position = you expect the value of EUR to increase against the value of USD, so you buy the asset and take a long position.
Short Position = you expect the value of EUR to decrease against the value of USD, so you sell the asset and take a short position.
Long position = you expect the value of Tesla shares to increase, so you buy them.
Short Position = you expect the value of Tesla shares to decrease, so you sell them hoping to buy them back for less.
How to Go Long and Short in Trading: Things to Consider Before Taking a Position
OK, so we can now answer the question, what is the difference between going long and short in trading? The next question is, how do you do it? You’ll need an account at Skilling. You can create a free demo account to start with. This allows you to explore the trading platform and place long and short orders using a virtual bankroll.
Once you’re comfortable with the mechanics of taking long and short positions, you can verify your account and start trading for real. This requires several considerations because your capital is now at risk. Going long and short in trading is just like any other strategy in that you can make a profit or lose money. There are no guarantees. So, before you go long or short, here are some things to consider:
- What are the market indicators suggesting?
- A combination of technical and fundamental analysis can show whether the asset is bullish or bearish.
- How much are you willing to invest/risk?
- Taking a short position can be a lot more costly because a strong bull run for the asset can leave you with a large debt to cover. Depending on the market, you may not exit short positions as quickly.
- There may be limits on the number of trades taking place if the market is in freefall.
- For example, the Securities and Exchange Commission (SEC) has an alternative uptick rule, which limits the number of short trades on stocks when their value drops by over 10%. This prevents a surge of short trades from driving down the stock’s value even further.
More Key Concepts: Long and Short Q&A
Before we bring this guide to going long on short in trading to a close, here are some additional terms you need to know:
- What is a bull market? A bull market is when an asset is bullish i.e. its value has positive movement because there is more buying activity than selling activity.
- What is a bear market? A bear market is when an asset is bearish i.e. its value has negative movement because there is more selling activity than buying activity.
- What is a stop-loss? A stop-loss limit is when an order is automatically closed because of your losses hitting a certain point. With a stop-loss order, you define your maximum loss before you enter a position. If your losses reach that point, the software closes the trade.
- What is margin? Borrowing funds from a broker to trade a financial asset is known as margin. It’s the difference between the amount of money you’ve put into the value of the trade and the amount borrowed from the broker. When you trade with margin, you’re leveraging a position i.e. gaining more market exposure than you otherwise would have because you’re using your money + borrowed funds.
To improve your overall strategy before you go long and short in trading, use these resources to learn more about how to play the financial markets:
Not investment advice. Past Performance is not indicative of future results.
This guide on correlation provides a comprehensive understanding. Learn to calculate it, its importance to traders, and ...
Maximize your trading profits with our guide to lot size. Learn how to calculate and determine the right lot size with e...