I am long! Let’s short it! Have you ever heard other people say these things before? If you’ve ever been an active participant in any financial market (like the crypto market), your answer is probably yes. But even if you haven’t heard of long and short positions or don’t know what they exactly mean, they are straightforward concepts that you can understand by just reading a few paragraphs, like the ones below. So let’s read on!
What is a long position? (what does going long mean?)
When you buy a financial asset, like a cryptocurrency, in the hopes that its price will go up, you have a long position on it. When you’re long on an asset, you can have profits when its price goes up and the maximum loss (if you don’t control your risk) occurs if the price goes to zero.
For example, if you buy one bitcoin when its price is 50.000 dollars, you have a long position. Now if the price goes to 60.000, you can sell your position with a profit of 10.000 dollars. But if the price goes down to 40.000 and you sell, you’ll lose 10.000 dollars. And if by some off chance price goes to zero, you’ll lose all of you 50.000 dollars, although this is very unlikely when you buy an asset that has great fundamentals.
So in a long position, your profits don’t have a limit in the best case scenario. But in the worst case scenario (if you don’t control your risk), your losses will be equal to the size of your position when you’ve bought the asset. (In some very rare cases, the price can go negative. But it’s highly unlikely and not worth worrying about.)
What is a short position? (what does shorting mean?)
If you want to short a financial asset (like a cryptocurrency), you will borrow and sell it immediately in the hopes that its price will go down from here. When the time comes to give back what you’ve borrowed, you have to buy back what you’ve sold. So if you’re right and the price goes down, you can sell high and buy low to take some profits. But if you’re wrong, you’ll have to buy back at a higher price and you’ll lose money.
But who do you borrow from? As a retail trader, you’ll borrow from the exchange that you use and the funds in your account will work as collateral. (We recommend using Kucoin or Binance for all long and short positions!)
For example, if you short one bitcoin when its price is at 50.000 dollars, you’ll get one bitcoin that you can sell immediately at this price. The terms of your borrowing are clear from the start and you know that, for example, within one week, you have to give back the one bitcoin that you’ve borrowed.
So you wait for the price to go down. If it goes to 40.000, you can buy one bitcoin and give it back to the exchange for a profit of 10.000 dollars. But if the price goes to 60.000 and you decide to close your position and cut your losses, you have to buy back the one bitcoin you’ve sold at the new price and you will lose 10.000 dollars.
So as you can see, in the short position, your profit in the best case scenario (which is the price going to zero) will be equal to the size of your position when you’ve bought the asset. But because there is no limit on how much the price can go up, your losses will have no limits in the worst case scenario, if you don’t control your risk properly.
Which position is riskier?
Short positions are usually considered the riskier option, because their loss has no limits. Of course, you can limit your risk by using stop loss orders. (If you’re not familiar with different types of orders, see this post.) But risk management is a whole other topic and lots of people don’t do it right.
Which kind of position should I use?
It totally depends on you. But most new traders will have trouble with short positions. Because shorting a cryptocurrency or stock can seem like an abstract process when you have less experience. So if you’re not comfortable with the concept of shorting, don’t use it. You can lose a lot of money fast, otherwise.
Other than this, if you’re a bull, you’ll most often go long and if you’re a bear, you’ll most often go short. (If you don’t know what bulls and bears are on the financial markets, read this post.)
Write about your first experience with long and short positions in the comments below.
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***Last Updated on 15 January 2022 by Guy with a Wallet