What are Long and Short - Essential Trading Strategies

In the world of financial asset trading, there are two main approaches that every trader must understand and master: long and short trading. Both methods are fundamental to generating profits in a market that moves in two directions—up or down—allowing traders to profit regardless of market direction. Let’s explore the details of these two strategies thoroughly.

Difference Between Long Position and Short Position

Long and short trading differ fundamentally. A trader who opens a long position believes the asset’s price will rise. They start by buying and wait for the price to increase before selling to realize a profit. This is called “buy low, sell high.”

Conversely, a trader who opens a short position bets that the price will fall. They sell shares or assets they do not yet own by borrowing from a broker, then wait for the price to drop before buying back to return the assets. This is called “sell high, buy low.”

The key point is that a long position is the traditional trading method most investors are familiar with, while a short position allows traders to profit even when the market declines, opening up more opportunities to profit in both directions.

How to Use Short and Long in Real Markets

Long Trading – Example from the Stock Market

Imagine you are an investor named Somchai. You receive information that PEAR company will report better quarterly earnings, likely causing its stock price to rise. Somchai decides to buy 100 shares at $35 each (total investment of $3,500). This is opening a long position.

Later, positive news impacts the market, and PEAR’s stock price jumps to $40. Somchai sells all 100 shares, making a profit of $5 per share, totaling $500 (40 × 100 - 35 × 100 = 500). This is a profit from buying low and selling high.

Short Trading – Example from the Stock Market

Now, consider another scenario. Somchai hears that Supply Yeurun Raw Material for ORANGE company will cease exports. He believes this will negatively impact ORANGE’s stock price. So, he opens a short position by borrowing 100 shares from a broker and sells them at $35 each (receiving $3,500).

As expected, the news causes the stock to fall, and ORANGE’s price drops to $30. Somchai buys back 100 shares at this lower price, spending $3,000, and returns the shares to the broker. He profits $5 per share, totaling $500 (35 × 100 - 30 × 100). This is profit from selling high and buying low.

Financial Instruments Supporting Long and Short Positions

Not all financial instruments permit short selling. Regular stock trading on exchanges always allows long positions, but short selling may be restricted or require complex borrowing procedures.

However, derivatives like CFDs, TFEX, and BlockTrades allow both long and short positions easily. CFDs, in particular, make opening short positions simple and quick, enabling traders to switch between long and short effortlessly.

The advantage of CFDs is that traders can use leverage, increasing potential profits. However, leverage also amplifies risks. Traders should verify whether their chosen instruments support short positions before investing.

Real-World Profit Examples from Long and Short Trades

Lesson from Long Trading

In the main example, Somchai opens a long position at $35, expecting the price to rise. He waits until PEAR reaches $40 and then closes the position, earning a $500 profit.

But imagine a different scenario: if the market moves against expectations, and the price drops to $32 after he opens at $35, Somchai must decide to cut losses. He sells at a loss of $3 per share, totaling $300. This illustrates that long positions carry the risk of loss if the market doesn’t move as anticipated.

Lesson from Short Trading

Similarly, if Somchai opens a short at $35, expecting the price to fall, and it drops to $30, he profits $500 when buying back at the lower price.

However, if the price rises instead to $38, he must buy back at a higher price, incurring a loss of $3 per share, totaling $300. Short positions carry the risk of unlimited losses if the market moves against the position.

Tips for Careful Long and Short Trading

Both long and short positions carry their own risks. Successful traders do not invest randomly; they analyze and study the market systematically.

For long trades, look for positive signals such as good news, strong earnings reports, or technical indicators indicating upward momentum before opening a position.

For short trades, be especially cautious, as losses can be unlimited if the market continues to rise. It’s essential to have a clear risk management plan, including setting strict stop-loss points to limit potential losses.

Modern trading tools like CFDs enable traders to implement diverse strategies, whether going long in anticipation of rising markets or shorting in declining markets. Both methods can generate profits if traders possess the right knowledge, tools, and risk management practices. With careful planning, long and short trading can be effective strategies to profit from volatile markets.