What are Long Position and Short Position? Basic understanding for traders

Long Position (Buy) and Short Position (Sell) are fundamental concepts in derivatives trading that both experienced traders and beginners need to understand in order to manage risk and enhance profit potential from price movements.

What is a Long Position (Long)?

Long Position refers to a trader placing a buy order for an asset, expecting the price to rise in the future. When the price increases as anticipated, the trader closes the (Sell) position to realize a profit from the price difference.

This strategy is suitable for bullish trends and is based on the principle of buy low - sell high.

Example: Suppose Tim analyzes that PEAR company stocks will perform better. He decides to open a Long Position by purchasing 100 shares at $350 each (with an investment of $35,000). When good news is released, the stock price rises to $400. Tim then sells all his shares and makes a profit of $5,000 from the price difference.

However, if the price moves against expectations, such as dropping to $340, and Tim closes his Long Position immediately to avoid further losses, he would incur a loss of $1,000.

What is a Short Position (Short)?

Short Position means a trader initially sells an asset, expecting the price to decline later. When the price drops as expected, the trader buys back the asset to profit from the downward price difference.

This strategy is suitable for bearish trends and is based on the principle of sell high - buy low.

Example: Suppose Tim hears that a country supplying raw materials for ORANGE company will suspend exports, leading him to expect ORANGE stock to fall. He opens a Short Position by borrowing 100 shares from a broker and selling them at $350 each (receiving $35,000). When the news is confirmed, the stock price drops to $300. Tim buys back 100 shares at this price (spending $30,000) and returns the shares to the broker, making a profit of $5,000 from the Short Position.

The key point is if the price rises instead, for example to $360, Tim would need to buy back the shares at a higher price, resulting in a loss.

Tools Supporting Long and Short Positions

Long Position orders are available for most derivatives, such as Forex, Derivatives, and Futures contracts.

Short Position orders are not available for all instruments. They are typically supported by:

• Derivatives (Derivatives)
• Tfex (Futures Market)
• BlockTrade
• CFD (Contract for Difference)

Traders should verify that their trading platform allows opening Short Positions before executing trades.

Summary

Understanding the difference between Long and Short Positions is essential for traders to select appropriate strategies based on market conditions. Whether the market is bullish or bearish, a thorough grasp of Long and Short Positions enables traders to be more flexible in profiting from market volatility. However, using these tools requires good risk management to prevent potential losses from unpredictable price movements.