What does short position mean in trading? What type of trade to choose

What are long and short positions

30-12-2020

Short and long positions are the two concepts that may seem confusing to those who just started their journey in trading, although there is nothing fundamentally complicated about these expressions. After reading this article you will learn how to choose the right type of trade in each specific scenario.

Content:

1. Definition of the Short Position
2. Long Position: Definition and Essence
3. To Go Long, or to Go Short, That Is the Question

Definition of the Short Position

When it comes to financial markets you can make two types of trades — either to buy or sell the asset. Trading platforms offer several types of orders for each one. You can make the trade right away at the current market price or later when certain conditions are met. This type of order is called pending.

The short position implies the sale of the financial asset. It is opened in order to make money with the price drop. In other words, if the trader knows that the price is about to go down, he/she may decide to sell the stock at a higher price and buy it later when it becomes cheaper. The difference between these prices will be profit.

The short position is also referred to as:

  • short trade;
  • slieculation for a fall;
  • shorting which means “to sell”;
  • a bearish liosition (trade) since the sellers are known as the “bears” in the financial markets.

Long Position: Definition and Essence

PLEASE NOTE:

Long position is basically a trade whereby an asset is purchased. Make sure not to confuse it with long-term trades!

It is aimed at making money from price growth. Let’s assume that the central bank announced that it was going to increase the interest rate. This typically makes the exchange rate grow. Based on this information, the trader purchases the currency and takes profit when the exchange rate goes up.

Similar to the way the short position is defined, the trade where the asset is purchased can be referred to as a long position or bullish trade since the market players who buy financial instruments in the stock exchange are known as “bulls”.

long and short positions

To Go Long, or to Go Short, That Is the Question

We have already established that long positions are opened in anticipation of the price growth. When going short, or opening short positions, the traders profit from the price drop. That’s how they make money with price fluctuations.

Below are a few tips on how to understand whether to enter long or short positions:

1. Perform a fundamental analysis of the financial asset. Identify the factors that currently affect the price and whether they promote its increase or drop.

2. Perform technical analysis, draw support and resistance levels, and identify existing market trends. If you don’t know how to do that yet, make sure to undergo training at Gerchik & Co.

3. You need to open the long position from the support level, and when the price bounces off the resistance, you must go short.

4. Stick to the trading strategy at all times. Each of them outlines when you should open long positions and short positions.


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