Trading conceptsUpdated 2 min readBy the FXNOD team
Long vs short trading: what going long and short means
Going long means buying, expecting the price to rise, and profiting if it does. Going short means selling first, expecting the price to fall, and profiting by buying back lower. On a long position the loss is limited to what you paid. On a short position the price can rise without limit, so the possible loss is larger unless a stop is used.
Side by side
| Long | Short | |
|---|---|---|
| You | Buy first, sell later | Sell first, buy back later |
| Profit when | The price rises | The price falls |
| Also called | Bullish | Bearish |
| Worst case without leverage | The price falls to zero | The price rises with no ceiling |
| Close by | Selling | Buying |
How shorting works
With shares, a short seller borrows the shares, sells them, and later buys them back to return. With derivatives such as CFDs you do not borrow anything: you simply open a sell position on the price, and the contract pays the difference. In forex, every trade is long one currency and short the other at the same time.
Risks particular to shorting
- Losses can exceed the initial value, because prices have no upper limit.
- Short squeezes: a rising price forces short sellers to buy back, which pushes it higher.
- Financing costs and, with shares, borrowing fees.
- Markets that rise over the long run work against holding shorts for long.
Does direction change the method?
The analysis is the same in mirror image: resistance instead of support, lower highs instead of higher lows. Falls are often faster than rises, so short trades tend to work or fail more quickly. Risk management is identical: a stop where the idea is wrong, and a position sized to it.
On options
Fixed-payout options make direction a simple choice with the same capped risk either way. Buying a Fall, a Lower or a Put expresses a bearish view without the unlimited loss of a short position: the most you can lose is the stake. The same is true of a Down multiplier, which is stopped out when the loss reaches the stake.
Position and bias
- A long position is a holding. A long bias is an expectation.
- Being flat means holding nothing, which is a position too and often the right one.
- Net long or net short describes the balance of several positions.
Questions people ask
- Is shorting riskier than going long?
- The possible loss on a short has no ceiling, so without a stop it is. With a stop and correct size, the risk per trade is the same.
- Can beginners short?
- Yes, with a stop loss. Fixed-payout options offer a bearish trade with the loss capped at the stake.
- What does going long mean in forex?
- Buying the first currency of a pair and selling the second, expecting the pair's price to rise.
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