Long Position vs. Short Position

The present article aims to reveal the meaning and how long and short positions work. As all of us have heard at least once, the adage "buy low, sell high", is relevant to the financial markets. Indeed, buying low and selling high is generally a good financial investment strategy to maximize returns. In order to achieve this goal, traders conduct different types of trades. Taking an example with forex trading, if a trader considers a currency will appreciate (go up), he/she will “Go Long”(Buy) the underlying currency, meanwhile, if a trader expects the currency to depreciate (go down), he/she will “Go Short” (Sell) the underlying currency. In corporate jargon,  such concepts are called long or short positions, which are used to maximize traders' profits, from both the rise and fall of exchange rates. 

What does Long Position & Short Position mean? 

Long simply means to buy, also used in trading as a long position  “going long” or “taking a long position“, which implies buying the base currency and selling the quote currency. 

In this type of trade, it is expected that the market to rise above the point where a long position (buy) was opened. If the asset has risen in value, the trader will be able to sell it for a higher price, so having benefit from a market that is on the rise.

Short simply means to sell, also used as “going short” or “taking a short position”, which implies selling the base currency when a price declines.

Going short is the opposite of going long, where a trader anticipates the market will rise and would open a buy position. As a rule, traders open a short position in a bearish market, and they open a long position in a bullish market.

In addition, when a trader is going long (buy), he/she actually buys the base currency (first currency in the pair) and sells the quote currency (second currency in the pair). 

The long and short positions have nothing to do with the duration of the trades. For example, a short can last a day or even a week, and a long can last half an hour or an hour. These terms appeared due to the fact that market growth is usually a longer process, so the word going long derives from this process.

In Forex trading terminology jargon, holders of long positions are called bulls, and short ones are called bears. Bullish, bull and long are often used interchangeably, you might hear, “I am long” or “I am bullish” which means a trader believes that prices will rise.

Obviously, just as a bull pushes or strikes with the horns, so traders, buying assets, make prices rise higher. Bears, on the contrary, beat the enemy with their paw from top to bottom - and traders selling their assets bring them below.

How does a short work?

Going short attracts many traders who want to make quick profits. However, going short comes with many risks. Actually, it is possible to make good money only on a quick decline in the price of an asset, and only experienced traders can calculate this. In addition, the massive opening of short positions, or a game for a fall, can destabilize financial markets, so shorts are periodically subject to legislative restrictions.

In order to guarantee a profit from a short position, one must wait for a reliable signal that the asset growth is ended. Such cases are well shown in the charts. There are patterns that allow you to see the end of an upward trend.

Short and long in work

It cannot be unequivocally stated that one or another position is better and more profitable. Some traders prefer to take only long, counting on the price movement up, while others prefer short and get a quick profit. There are those who open both long and short (sometimes even at the same time). There are many opportunities to make a profit in trading, and in certain situations, long and short might be the ultimate tools for this.

Both positions involve risks. In some cases, you can hold on a very long time for profits from a long trade and never get them. Short may not work due to the fact that the forecast of the market fall did not go ahead. Furthermore, in some instances, like asset declines steeply or in the event of a short squeeze, the transaction may be forced closed by the brokerage firm. 

However, traders should not ignore any of the positions. Trading on foreign exchange provides many opportunities for both bulls and bears.

If you know the theory already, deliberate practice to maximize your potential. Open an account with CMX Markets and engage in the world of trading with us!