Long Short means: Understanding both bullish and bearish orders

Traders, both new and experienced, encounter these two terms in a trading day: Long and Short. But what exactly are short and long? These commands are fundamental tools that help investors profit from both expanding and contracting markets. Let’s explore how Long and Short orders work and how you can apply them to your trading strategies.

What Are Long and Short, and Why Are They Important for Traders?

In financial markets, the terms Long and Short refer to two opposite trading directions. Long means you expect the price to rise, while Short means you expect the price to fall. These orders are not used for all assets but are applicable to derivative instruments such as Derivatives, CFDs, TFEX, and Block Trades.

Long Position: Buying and Waiting for Price to Rise

When a trader opens a Long position, they are placing a buy order for the asset, anticipating that its price will increase in the future. This strategy is called “buy low, sell high,” and is the traditional approach most investors are familiar with.

Example of a Long Position: A trader decides to buy an asset at 100 baht, expecting the price to go higher. When the price reaches 105 baht, they close the position by selling the asset. The result is a profit of 5 baht per unit.

However, if the market moves against expectations—say, the price drops to 95 baht—the trader may need to close the position, incurring a loss of 5 baht.

Short Position: Selling to Wait for Price to Drop

Conversely, a Short position involves selling an asset first, expecting the price to decline. This strategy is called “sell high, buy low,” giving traders a way to profit from falling markets.

Example of a Short Position: An investor believes a stock will decrease in value. They borrow 100 shares from a broker and sell them at 350 dollars each, earning 35,000 dollars. When the price drops to 300 dollars, they buy back the shares at the lower price, costing 30,000 dollars, and return them to the broker. The profit is 5,000 dollars.

If instead the price rises to 400 dollars, the trader faces a loss when buying back at the higher price.

Long and Short in the Stock Market: Real-Life Examples

Example 1: Long Trading in PEAR Stock

Suppose an investor named Tim hears that PEAR company has strong earnings and expects the stock price to rise. He opens a Long position by buying 100 PEAR shares at 350 dollars each, investing a total of 35,000 dollars.

As good news spreads, other investors buy PEAR shares, pushing the price up to 400 dollars. Tim closes his position by selling all 100 shares, receiving 40,000 dollars. His profit from this Long trade is 5,000 dollars.

Example 2: Short Trading in ORANGE Stock

Meanwhile, Tim hears rumors that the country will suspend exports of raw materials for ORANGE. Believing the stock price will fall, he opens a Short position by borrowing 100 ORANGE shares and selling them at 350 dollars each, earning 35,000 dollars.

The rumor spreads, and other investors also sell off ORANGE shares, causing the price to drop to 300 dollars. Tim buys back 100 shares at this lower price, costing 30,000 dollars, and returns them to the broker (Short Cover). His profit is 5,000 dollars (35,000 - 30,000).

Long and Short in Different Markets: Forex, CFDs, and Derivatives

The concepts of Long and Short are not limited to stocks. Forex markets facilitate easy Long and Short trading because traders can buy and sell currency contracts in both directions.

In CFD (Contract for Difference) markets, traders can more conveniently go Long or Short without the complicated process of borrowing assets, as in traditional stock trading. CFD platforms make it simple to execute Short orders with just a click.

In derivatives markets and TFEX, traders can also trade Long and Short, but they should verify whether the specific instrument allows profit from falling prices.

Comparing Long and Short: Summary Table

In summary:

• Long Position: Buy assets when prices are low, wait for prices to rise, then sell for a profit from the price difference.
• Short Position: Sell assets when prices are high, wait for prices to fall, then buy back at the lower price for a profit.

This allows traders not only to profit from rising markets but also to capitalize on falling markets, which is a key advantage of understanding Long and Short.

Precautions When Trading Long and Short

Traders should be aware that trading both Long and Short involves high risk. Using leverage can amplify losses if the market moves rapidly against your position. Proper risk management is essential.

Recommendations:

• Study thoroughly before trading live.
• Use Stop Loss orders to limit potential losses.
• Manage position sizes appropriately.
• Avoid excessive leverage.

Modern Trading Tools for Traders

Today, modern trading platforms like CFD brokers have made Long and Short trading much easier, especially for those trading stocks with Short commands that previously involved complicated procedures.

Platforms like Mitrade are designed to enable investors to trade over 400 assets with quick, convenient steps and leverage up to 1:200, allowing for small capital investments with the potential for significant profits.

New traders can also practice with a free demo account of $50,000 to learn Long and Short strategies before trading with real money. Plus, new customers receive a $100 bonus upon their first trade.

Understanding Long and Short is the first step toward enabling traders to profit from market volatility, whether the market is trending up or down.