The best way to make a profit is to buy at a lower price and sell at a higher price. This is a fundamental truth that is familiar even to those who are far from the financial sphere. While trading, market participants open short positions betting on the price falling and long ones hoping for a rise. BUY and SELL positions in the forex market are also called long and short ones respectively. In this article, you will learn what these terms mean in online trading.

Definition of short and long positions

A long position refers to a trader’s intention to buy an asset with a view to getting long-term returns. That is, an investor hopes to benefit from an upward price movement in an asset.

The principle of opening a long position:

  1. You buy an asset;
  2. Its value rises;
  3. Then you sell ​​the asset at a higher price.

Let’s consider a simple example. You register an account with InstaForex and open a long position on Google’s shares, predicting that their value will gain soon. After a certain period of time, your prediction proves to be accurate. Google develops and releases a new project, which boosts demand for the company’s stock. As a result, its share price edges higher. Then you close the trade and gain profit.

A short position is the opposite of a long position. Traders open short positions in order to profit from a bearish market. Thus, you open an account with a broker and purchase a financial asset. Then you sell the asset when it reaches a particular price point. As for CFD trading, going short refers to opening a short position to earn revenue from a price decline.

Let's take an example. You expect Google stock to lose in value and you want to take advantage of this forecast to make money. Next, you open a short position on the asset. After a while, your prediction comes true and the company's shares tumble. Accordingly, you close the trade and make a profit.

When you buy and sell financial assets, you have to incur certain investment expenses, including stock exchange and brokerage fees, as well as taxes. In the above examples, we did not take into account these costs so that the principle of opening short and long positions could be more easily understood. Notably, InstaForex charges no additional fees for trading CFDs on company shares and other assets.

Besides, it is important to understand that the “long” and “short” terms do not stand for the length of a trade. Thus, a short position can be held for days or even months, and a long position can be closed within an hour. The origin of these names can be attributed to the fact that growth in the market usually takes longer.

Going short and long at the same time

At first glance, it might appear that long and short positions in stock trading are interchangeable transactions. However, some strategies imply that long and short positions can be opened simultaneously. That is, you buy a short stock position against a long one. In some cases, you can open a short position on one financial instrument and a long one on another. Technically, this means hedging risks.

How to use short and long positions

Going short is of particular interest among traders as such positions are generally considered the most lucrative. However, they carry numerous risks. A short position can bring you a profit in case of a fairly steep drop in prices, while such price fluctuations can be predicted only by professional traders. A massive sell-off may lead to market destabilization. Therefore, some regulators even impose restrictions on short selling activity.

Despite the growing popularity of short positions, it is impossible to say for sure which position is more profitable. Some traders have learned to make good money on long positions, counting on an advance in prices, while others work with short ones that yield quick returns. There are those who open both types of positions at the same time or use them alternately. Trading offers plenty of opportunities to gain profit. Now, long positions are relevant, the next moment the situation can change dramatically.

To generate income in the market, it is not enough to understand the principle of opening short and long positions. You also need to know when to buy and sell stocks or other financial instruments.

Conclusion

In the market, you can benefit from both short and long positions. At the same time, it is important to remember that trading bears the risk of losing money. Your forecast may be inaccurate, or a broker may forcibly close a trader's position. Despite the risks, a trader should not refuse to use any of these positions, because the market provides infinite possibilities for both bulls and bears.