As a beginner in crypto trading, one might initially encounter terms that seem complex. An example is the pair of terms known as “long” and “short” positions. While they may sound daunting, understanding these concepts is key to a successful cryptocurrency trading career.

Long and short positions offer unique ways to capitalize on market movements, and understanding their differences is key to using them effectively. All traders, whether beginners or experienced, must be able to tell the key differences between both positions to make more informed decisions when trading.

What is a Position?

Source: freepik

A trading position can be described as the outcome of a trader’s decision to buy or sell a currency, stock, or cryptocurrency. This decision is based on the trader’s assessment of various factors that would influence the price’s movement. These factors include technical analysis of the price charts, market trends, news events, and more. Depending on the price movement, traders stand to make potential profits or incur losses. In simpler terms, a position is the amount of an asset a trader holds or has sold.

Understanding the Short Position?

A short position is a trading strategy where a trader sells an asset, hoping for a decrease in price so they can buy it back at a cheaper rate to make profits. This technique is also known as short selling. In other words, the trader assumes that the asset’s price will decrease over time, allowing them to profit from the price difference.

Shorting a token like Bitcoin (BTC) involves borrowing it from a broker and selling it at the current market price. If the price drops as expected, the trader can buy the token back at a lower price, return it to the broker, and keep the price difference as their profit. For example, if the trader borrows 1 Bitcoin at $30,000 and the price falls to $20,000, they could buy back the Bitcoin for $20,000, making a $10,000 profit.

As lucrative as the strategy looks, traders must analyze the asset and market carefully before opening a short position. They should look for factors like whether the project is viable, has secured investments from well-known angel investors, or has partnered with reputable firms.

After opening the position, the trader should look for certain chart and candlestick patterns that indicate an upcoming downtrend. Chart patterns include double tops, triple tops, and head-and-shoulders, while candle patterns include the hanging man, shooting star, and gravestone doji.

Some traders prefer opening a short position when the asset’s price falls below a point where it usually doesn’t drop below. This is known as a support level, and it is relevant especially when the price has been moving within a certain range for a while, and whether that range is moving up (bullish), down (bearish), or stays the same.

On the other hand, traders can open a short position by leveraging the price swings in the channel itself, and as such, they don’t need to wait for a breakout. So, when the price touches the support level, the trader can enter a short position, betting the price will hit the support level again.

Either way, traders must be confident that the asset’s price will decrease to open a short position. Failure to do this will result in trading against the market.

What is a Long Position?

A long position is defined as buying an asset with the assumption that its price will eventually rise. As such, traders typically hold onto the asset for a while and don’t sell it immediately. This type of position is usually resource-intensive, as traders would be required to pay large up-front purchases (as opposed to short-selling), broker commissions, and other fees.

Similar to the previous example, if a trader expects Bitcoin to increase in price, they can buy one Bitcoin at a price of $30,000 per coin. When BTC increases to $60,000 per coin, the trader doubles their profit ($30,000). However, if the trader sells when the price falls, they will incur losses.

Entering the market in a long position requires extensive market analysis. Traders can wait until the price breaks above a strong resistance point. Resistance points are the opposite of support levels, as they are the point where the price has usually never gone above. They can also go long during an ongoing uptrend in price movement and hope it will continue.

Investors with enough resources typically buy and hold their tokens. As such, they don’t trade actively, preferring to hold the asset for months or years, assuming its price will increase in value despite any uptrends or downtrends.

This strategy often requires large deposits and is a more long-term trading style. Long-position traders use chart patterns like the double bottom, inverse head and shoulders, ascending triangle, or hammer. They also use candlestick patterns like the hammer and dragonfly doji.

Some readers may wonder why traders don’t simply say “buy” and “sell” to describe long and short positions since they involve buying and selling. The main difference lies in the type of trading involved. The terms “buy” and “sell” are typically used in spot trading, which is more investment-based. On the other hand, the terms “long” and “short” are used as speculative trading terminology.

How to Open Long and Short Trading Positions

Source: gate.io

Before you can start trading, you need to undergo a few steps. First, you’ll need to create an account on gate.io. After signing up, verify your account according to KYC regulations and deposit funds into your account using either fiat or cryptocurrency.

When depositing, ensure you have enough funds to support your trades and cover margin requirements. This is important because, with margined trading, traders need to borrow funds to open larger positions. Gate.io allows you to choose the leverage amount, ranging from 10 to 100 times your initial collateral (or margin), depending on the asset. In simpler terms, margin trading can allow you to perform a $100 trade with $1 at a leverage of 100. However, your trade(s) will be automatically closed if you lose all your margins.

After funding your account, head over to the Futures trading section of the website. You can find this by going to the “Futures” tab in the top navigation bar and selecting “Perpetual Futures” from the dropdown menu. This will bring you to the page where you can open long or short positions.

Select the cryptocurrency pair you want to trade once you’re on the Futures trading page. For example, if you want to trade Bitcoin against USDT, search for the BTC/USDT trading pair. Gate.io currently offers a variety of trading pairs so that you can pick the best suit for your trading strategy.

You can open a position through a market order or a limit order. Opening a market order position lets you enter and exit the trade immediately. In contrast, with limit orders, you can set the price you wish to buy/sell for and how many tokens you wish to get for that price, and the trade won’t be executed until those parameters have been met. To open the position, simply set your variables: price, leverage, take profit, stop loss, and size. Afterward, choose between Buy (Long) or Sell (Short) and confirm your transaction.

After opening the position, you can find pending orders in the “Positions” tab at the bottom of the page. You can monitor your orders from there and modify/exit your trades. Please note that before entering any trade, you are advised to do enough research, and watch out for favorable market trends indicating the possibility of the position you’re about to take.

Differences Between Short and Long Position

The short and long positions have major differences that every trader should keep in mind, such as:

Price Expectations

A long position is characterized by purchasing an asset with the assumption that the price will increase, while a short position involves selling an asset (usually borrowed from the broker) expecting a short-term decrease in price.

Entry/Exit Strategies

Making profits from a short position involves buying the token at a lower price and selling higher while closing a long position involves selling the asset at higher prices to lock in profits. As such, each trade’s entry and exit points are key to successfully implementing either strategy.

Bullish vs. Bearish Outlook

The long position has a bullish market outlook, so the trader expects the token’s price to attain higher highs over time, while the short position has a bearish outlook, so the trader assumes the market prices will fall.

Asset Ownership and Profits

Long-position traders typically own the assets they trade, while short-position traders borrow and sell their assets. Long-position traders also profit from price increases, whereas short-position traders profit from price decreases.

Risk Appetite

Long position traders only risk the amount they have invested, as they purchase tokens at specific prices. On the other hand, short-position traders may face significant losses if the asset’s price keeps rising.

Which Strategy is Better?

The decision to take a long or short position in crypto trading mainly depends on your market outlook. Taking a long position means you expect the price to increase; taking a short position means you believe the price will eventually fall.

You also need to consider how much risk you can handle. With the long position, you can only lose the funds you invested, while the short position has no cap. As such, incurring losses in a short position can potentially liquidate your account.

The choice between long and short positions also depends on how long the trader plans to keep their investment. Long positions work best as long-term strategies, while short positions are more suitable for short-term trading.

Nonetheless, traders must be up-to-date on the latest market trends and developments. You should also monitor the ratio of long and short positions in the market, as they can provide key insights into market sentiments, influencing market liquidity and price movements. For example, If there are many short positions, it might mean most traders feel negative about the market. But if most people take long positions, they probably feel positive about the market.

Can You Use Both Long and Short Positions?

Investors use long and short positions to achieve different results. Oftentimes, an investor may establish long and short positions simultaneously to leverage or produce income from a transaction. They can also use both positions to hedge against possible portfolio losses.

Conclusion

In conclusion, understanding the dynamics of long and short trading in the crypto market is crucial for traders to navigate the ever-changing landscape effectively. Both strategies have advantages and risks, so traders should carefully consider all variables associated with their preferred trading strategies when picking a long or short position. They should also be constantly updated on recent market developments so they are never caught off guard.