Every trader has heard such English terms as long or short at least once in his life. What it is? We will try to reveal it in this material.
This is important to know for all traders who want to achieve certain success not only in Forex, but also on the stock exchange. After all, by understanding what short and long are on the stock exchange, you can consider different Forex trading strategies and understand what we are talking about, rather than being left guessing.
What is short and long on the stock exchange?
On the stock exchange, as in the Forex market, traders can open Long (long) positions or Short (short) positions. It is important to know what long and short positions are. Let's consider each concept separately.
Long positions
When purchasing securities, the trader opens a Long position. That is, it is assumed that securities will be purchased at one price, and after a while, when their price is higher, the assets will be sold. A long Long position is opened with a BUY order, and closed with a SELL order.
Figure 1. Long positions (Long).
Short positions
A short position is opened on the stock exchange when a trader borrows securities from a broker for the purpose of selling them. The trader opens a short position only if he is confident that the price of the security will fall. Thus, the player borrows securities from the broker at one price and after a while closes the short position at a low price (buys back the securities). The player's profit lies in the difference between the purchase and sale prices.
Figure 2. Short positions (Short).
Short selling is triggered by a SELL SHORT order. The operation of closing a short position is called CLOSE SHORT.
Short and long in Forex
The concept of short and long is not only found on the stock exchange. A Forex trader must understand the difference between short and long in Forex, as this is the basic thing to know.
Short position on Forex (short)
So, a Forex short is a transaction opened by a trader for a particular currency pair with a Sell order. Market participants open Short positions when they believe that the market will move in a bearish trend line or there will be a correction in an upward market. This name was taken from observations of the behavior of foreign exchange assets. The price often moves up longer than down.
Throughout history, global markets have suffered many crashes. The first collapse occurred in the 17th century. Next came World War I, and then the Great Depression. People could lose all their money in a day, as there was a lightning-fast drop in the currency, that is, price drop in a short period of time. Here's where the name Forex shorts comes from.
When does a short occur? Does Short appear in Forex? A short position is opened by a trader when the trader decides to sell a particular currency pair. For example, let it be selling the GBP/USD pair. It is assumed that the player wants to sell the British pound for a dollar. At this very time, he opens a long position on the US dollar.
If we compare Forex and the stock exchange, then a short position in the Forex market is no different from a long position. However, it is impossible to enter a short position on some assets on the stock exchange. Also, stock indices are constantly rising in a normal global economy. In parallel with them, growth is observed in such currencies as: British pound, Swiss franc, euro. Generally speaking, EU area currencies rise more often than they fall. But recently, this trend has not been observed.
Short positions are predominantly opened intraday, based on fundamental data or technical analysis.
Long position on Forex (long)
A long Forex position is when a trader opens a Forex order at one price, and when this price rises, he closes it, making money on it. That is, the player counts on the growth of the selected currency pair in order to make a profit.
You can open a long position on the Forex market using the Buy button or by placing pending orders Buy Stop or Buy Limit.
A long Long position is closed at take profit or manually during a rollback, which can change the uptrend. You should always open long positions along an uptrend on higher timeframes (from H4 to W). Risks increase significantly if a trader opens long positions against the global trend.
We hope you understand what long and short are in trading and what they are used for.
Conclusion
So, we found out what long and short positions are. We also looked at shorts and longs in Forex using examples and studied situations when it is better to open Short and Long positions, and when it is not worth it.
The essence of working on the international currency market comes down to opening and closing transactions and making a profit on the difference. In this case, transactions are divided into two types - buy and sell.
A long trade in Forex is a buy trade.
Alternative names for such positions are long trade, purchase, buy, long position. All of them will be found in the relevant literature, since without indicating the nature of the transaction it is impossible to explain any strategy on the international foreign exchange market.
A long in Forex is a transaction that is opened with the expectation of an increase in the rate of the selected asset and making a profit from the upward price movement. Translated into Russian, this word means long. This name was chosen because raising quotes is a much longer process than lowering them.
You've probably often noticed in the literature the contrast between bullish and bearish movements. This is due to the fact that market participants who open buying transactions are called bulls, and upward price movement is, accordingly, bullish. There is an association with a bull that uses its horns to push the value of an asset upward. In addition, long in Forex is the direct opposite of short positions, which are opened by bears, and downward price movement is bearish, as if a bear is knocking down the price with its paw.
Long in Forex - signs and features
For example, you want to work with the euro/US dollar currency pair. By opening a long position, you are actually buying euros with American dollars. In this case, the euro is considered the base currency, and the dollar is the quoted currency. Profit will be made if the pair’s quotes rise.
Thus, we can conclude that it is advisable to open a long trade only if you are confident that the existing upward trend will strengthen. For this, all kinds of trend indicators are used, as well as fundamental analysis, which takes into account factors such as the publication of major news, macroeconomic statistics, increases in interest rates of central banks, etc. If we talk about technical analysis factors, the most common buy signals are rebounds from the support level.
As for closing longs on Forex, profits are usually recorded when quotes reach the opposite boundary of the price channel. It's about reaching the resistance level. The MetaTrader trading terminal uses take profit to automate this process.
The profit received from long transactions is equal to the difference between the funds invested when purchasing the base currency and the funds received as a result.
From exotic theories of market analysis to deep problems of trading psychology. But sometimes basic things remain behind the scenes.
For example, now many new traders have come to me for personal support, and they constantly ask: “How to open a short (bet on a fall) in order to make money on a decline in securities?”
The essence of a “short” or a sell transaction in the stock market It’s simple – sell other people’s borrowed shares while they are expensive and buy them back as cheaply as possible.
1) Take “Short”!
Balance the need to short a stock with your financial plan goals. Are you sure that you should use a sell position in your trading strategy? "Short"– This is a speculator's weapon.
Stock market speculators are those people who do not have even 50% of the savings required to achieve the goals of their financial plan. If you have saved up at least 50% of the funds for the house, dacha, or car of your dreams, then what are the speculations? You need to be an investor - investors don't short!
2) Am I a “short”?
Before you analyze stocks and try to bet on their decline, make sure that the broker provides the opportunity to “short” these stocks.
At the initial stage, it is better to print out and hang in front of your eyes the so-called list of “margin securities”. Update this list at least quarterly.
Sometimes a broker divides traders into certain groups - with a high or normal level of risk, and there may be different lists for them. Check with the manager which group you belong to.
3) “Short” – a game of secured debt
The broker lends money for “long” and paper for “short” only against collateral. Make sure you have shares in your account that your broker can lend money against. Again, use the list of margin securities.
4) “Why am I, Burenka, selling you?”
Some traders try to "short" stocks that they currently have in their portfolio. They bought them once in order to make money on growth. Remember that you need to sell your shares first before you start to become short.
You can sell your no longer needed shares and bet on their decline with one order. Just enter a quantity greater than what you have.
Opening a “short” means selling! Closing a “short” means buying.
5) Stop a moment, you're terrible!
Before making a trade, determine where you will record your loss in case of failure.
By going short, we are making a commitment. The broker who lent us money will not tolerate our loss indefinitely and will trust us with the shares that we have “shorted.” Therefore, in case of danger, it is better to exit with a small loss rather than wait for the forced closure of the position!
To do this, place “ ” either before the transaction, if the logic of constructing the trading action allows, or immediately after it. No “stop” – no “short”!
6) Oops, ay did it egein!
Did you want to sell securities and go short? Now you don’t know how to place a stop on an unexpected long?
Erroneously placed positions should be closed immediately as soon as the mistake was discovered, even if time has passed and “long” already looks like a good idea.
After which you need to conduct a strict analysis, why did you miss the button? Are you tired, don’t know how to use the terminal, or are you sick? Without analysis of such an error, even a mechanical one, it is impossible to move forward.
Trading on financial markets, including the stock exchange, comes down to one simple rule: make a transaction according to certain criteria and then, after a certain time or according to some signals, close it and make a profit. Simply put, buy cheaper and sell more expensive. And put the difference between prices in your pocket.
But here we are talking only about increasing the price. You can also make transactions in the expectation that prices will go down in the future and make money from this too. Trading on the stock exchange constantly comes down to a struggle between buyers and sellers. Some hope that quotes will rise, others are confident that they will fall further.
Opening a long position
Buyers who make transactions in the hope of their further growth are said to open a long position or go long (from the English long - long). Such traders are called bull traders or traders.
The principle of the bullish game is extremely simple: buy low and sell high. That is, buy for 100 rubles, wait for the price to rise, say up to 130 rubles, and sell. Net profit will be 30%.
Let's look at the example of Moscow Exchange shares. Making a purchase of shares in September 2015 at a price of 75 rubles / piece. the trader predicts further growth in quotes, i.e. takes a long position. The forecast turned out to be successful and exactly a year later the shares were sold at a price of 130 rubles. The profit amounted to 55 rubles per share or 73% of net profit.
Long position on Moscow Exchange shares Short position or short
Short positions are absolutely opposite in meaning to long transactions. Here, market participants hope for a further decline in asset prices and therefore take short positions or shorts (from the English short - short). They are also called short sellers or bears.
When you go short, you borrow a security from a broker and sell it on the market in hopes that it will fall further. Then you buy them back at a lower price and return them to the broker. You keep the difference between the sale and purchase amounts for yourself.
Conventionally, this algorithm looks like this: you sell an asset borrowed from a broker for 100 rubles, after the price drops to 50 rubles, you buy it back and return the shares to the broker. You earned 50 rubles or 100% profit.
It goes without saying that brokers do not lend shares for nothing, but to borrow your money (or shares) in your brokerage account and for a certain percentage for the time you use them. Therefore, short transactions are also called short selling.
It should be understood that if you sell the shares you have, this is not a short sale, but closing a long position. Opening a short position is the sale of a borrowed asset and subsequent return to the owner.
For example, consider Megafon stock quotes. At the end of 2015, you open a short position, that is, you sell Megafon shares borrowed from a broker on the market for 950 rubles. In September, you close open positions - buying shares back at a price of 620 rubles. You return the shares to the broker, and take the difference of 330 rubles per share for yourself (if you do not take into account the additional remuneration to the broker for using the shares). Your profit was 35%.
Short position in Megafon shares Opening short positions using real-life examples
Often beginners cannot understand the meaning of short positions. How can you sell something you don't have? How can you sell, say, Sberbank shares on the stock exchange if you don’t own them?
If it’s clear with long positions, then with short ones at first glance everything looks strange. Analogies with long positions in our lives immediately come to mind. I bought tomatoes wholesale for 30 rubles per kilogram, and then sold them retail for 50 rubles. I took dollars for 50 rubles, a year later I sold them for 65. These are all long positions.
And now short or short selling. If you dig deeper, there is nothing unusual. Such transactions also happen all the time in our lives, but they don’t have a name. Here are some examples.
1 example. Vasya really wanted to drink mineral water. But he cannot leave the office and go to the store. You take 100 rubles from him and promise to bring him some water within an hour. You have just completed a short sale. After all, you don’t have water, but the money has already been received. You go to the store - buy mineral water for 70 rubles and give it to Vasya. Those. you closed your short position and made money from it.
2 example. Manufacturing of furniture to order. The intermediary seller who accepts the order and money from the buyer makes a short sale. He does not have this in stock, but he is obliged to provide the buyer with the goods after a certain time in full. The intermediary orders furniture from a furniture factory at a lower price, delivers it to the buyer, and pockets the difference between purchase and sale.
The advantage of long positions over short ones
Is there any difference between long and short positions in terms of making a profit?
If your main goal is investment and you rarely carry out transactions, you are willing to hold assets for months or even years - forget about short positions. Why? Absolutely all leading stock indices have an upward trend over long periods of time. And going against the trend is suicide. Yes, drops are possible, and quite serious ones, but according to statistics, approximately 80% of the time quotes go up.
Chart of the Dow Jones Industrial Average since the early 20th century When opening short positions, the trader incurs additional costs in the form of margin lending. If the short was opened and closed within one day, then you will get this pleasure for free. However, you will have to pay the broker to transfer positions to the next day. How many?
For leading brokers this is approximately the current refinancing rate increased by 1.5 - 2 times. Those. today it is approximately 15-20% per annum. Therefore, it is better to use shorts at short time intervals and not stretch the position over several months. Otherwise, it may turn out that almost all of the profit received as a result of the transaction went to the broker for the use of his securities.
It is believed that shorts are more dangerous than longs. After all, if you opened a long position and the price went against you, you can calmly sit out the unfavorable situation and wait until you make a profit. And you can wait as long as you like: at least a year, at least ten years. In the case of shorts, this situation does not work. Short sellers, if unfavorable situations develop, need to close the deal as quickly as possible, because if the price flies far up, the broker may force them to close it. And they will end up with a double loss: minus on the transaction + commission to the broker for using the securities. Therefore, it is not recommended for beginners to short securities.
If we turn again to the statistics of quotes and stock charts, we can draw certain conclusions from them. The price goes up slowly and gradually over a long period of time. Falls, although they last a short time, occur more rapidly.
Look at the Sberbank quotes chart. Since the early 2000s, there has been a gradual upward trend. Further in 2007-2008. there is a rapid drop in quotes from 110 to 15 rubles per share. And this is the level of 2004. Those. the price went down in just one year as much as it went up for 4 years.
We will understand what a long position and a short position on the stock exchange are (long and short), and also find out how to open such transactions.
Almost every single branch of human activity sooner or later acquires its own jargon. Stock trading also has its own vocabulary. A novice investor cannot do without understanding the sometimes specific expressions of traders and brokers.
One of the key terms of financial transactions on the stock exchange is the concepts of “long position” - “short position”. Or, in other words, long and short
The standard sales formula “bought low, sold high” is familiar to everyone. However, the stock exchange sometimes implements a scheme that is incomprehensible to the average person and at first glance paradoxical, when an investor “first sells high and then buys low.” We'll figure out how this is possible a little later.
What is a long position
A long position (or long, from the English long) characterizes a traditional situation in which an investor buys an asset with the expectation that its value will increase. After which he expects to sell it and make a profit.
Going long means buying securities that are expected to rise in value.
What is a short position
A short position (or short, from the English short) means that an investor borrows falling securities from a broker and sells them in order to buy them again after a while, but at a reduced price and, accordingly, make a profit again.
The decision to open a short position is dictated by a situation in which the investor is confident in the impending fall in the value of the asset
In this case, he borrows securities from the broker and sells them at the current price, and later, after the securities have actually fallen in price, he buys them back at a reduced price and takes a profit.
Margin trading
For many novice investors, the issue associated with opening short positions remains unclear. Namely, how you can sell what you don’t have. Here the trader implements the scheme margin trading.
Margin trading involves transactions in which assets are sold against the security of an agreed amount (margin)
With this scheme, goods are sold for the purpose of purchasing and returning a similar one after some time. This type of short selling is called a short position.
The scheme allows you to make a profit in a situation where prices are falling. If the securities lose value, the trader buys them back at a reduced price and returns them to the broker, keeping the profit for himself.
Trading in the securities market is a risky process in general, and opening short positions is especially risky. The value of securities, contrary to hopes and forecasts, may begin to rise. This means that the trader will have to invest his own funds to buy back the securities, which must be returned to the broker, who also risks in such a situation.
To insure yourself against serious losses, firstly, the broker compiles a list of assets for which the trader will have the right to open short positions. Typically these are fairly liquid securities.
Secondly, the broker protects itself by setting discount rates. They limit the amount of their own funds to open a short position. The ratios also give the broker the opportunity to force the closure of a position if it goes against the interests of the investor.
By the way, the principles of margin trading also work in the situation of opening long positions. In this case, we mean a situation where the broker provides the trader with additional money so that the latter can purchase more assets that are becoming more expensive, and therefore increase profits.
Risks here are also inevitable, but they are minimized by the fact that the broker also generates a list of exchange-traded securities for which it is advisable to open a long position. Limits are also set on the trader’s own funds, with which he plans to purchase assets.
In addition, the broker fixes in advance the minimum value of the asset, upon reaching which, in the event of a trend reversal in the negative direction, the long position will be closed automatically.
In the case of a positive trend, the asset systematically increases in price, the trader sells it at a certain moment and takes profit.
You need to understand that long positions can be opened using margin trading techniques, and exclusively with the investor’s personal funds. Short positions are possible only with borrowed funds.
Origin of terminology
The long position was named so due to the fact that historically there was an opinion among stock exchange specialists that the market would predominantly grow over long periods of time. The short position was named so because traditionally a downward trend lasts much less time than an upward trend.
We urge our readers not to depend on established opinions, but to analyze the specific, living and current situation that has developed in the market right now.
Bulls and bears
One cannot help but mention the jargon that is used to explain the concepts of short and long positions.
Thus, long positions receive the name "bullish". There is an opinion that this term was born due to the fact that a real live bull can hook something up onto its horns and wear it like that for some time. The bull is also characterized as stubborn, stable, capable of standing his ground for a long time.
The opposite phenomenon - short positions - is usually called "bearish". This term is also explained by the characteristics of animal behavior. Firstly, a downward trend is symbolically associated with the way a bear bends something with its paws and forces it to bend.
Another possible origin of the term may be related to the expression “To share the skin of an unkilled bear.” Thus, an investor, when selling an asset that he borrowed from a broker, risks not guessing the trend and not getting the profit he expected.
Finally
Despite the fact that stock trading is a risky business, you can certainly make big money from working in the market. A significant advantage is that you can trade on the exchange and make a profit regardless of the current trend, opening a short position in the case of a negative scenario, and a long position in the positive scenario. Also, experienced investors can apply the principles of margin trading, using them to receive additional profit.