Long and short positions, explained

What are long and short positions?

These two terms reflect whether a trader believes a cryptocurrency is going to rise or fall in value.

Cryptocurrency traders often use industry-specific jargon that is not fully understood by newcomers. While “longs” and “shorts” are not the most technical terms — in fact, they are at the core of trading — we’ll explain the two concepts, especially for newcomers, who are likely flooding the crypto market amid the devaluation of fiat currencies due to aggressive stimulus backed by governments and central bankers.

In a nutshell, long and short positions reflect the two possible directions of a price required to generate a profit. In a long position, the crypto trader hopes that the price will increase from a given point. In this case, we say that the trader “goes long,” or buys the cryptocurrency. Consequently, in a short position, the crypto trader expects the price to decline from a given point — i.e., the trader “goes short,” or sells the cryptocurrency.

While buying and selling is typical for spot exchanges, you can go long or short on a cryptocurrency without actually buying or selling it. This is possible on derivatives exchanges that offer futures, options, contracts for differences, and other derivatives products. When you trade these derivatives, you get exposure to cryptocurrencies via long and short positions but without “physically” owning or dealing with them.

That being said, you will see more long positions versus shorts in a bullish market, as more traders want to benefit from the price ascension. When the market is bearish, short positions generally exceed the long ones. However, this is only an observation and not a rule to follow. Professional traders and investors usually buy the dips and sell the rips — i.e., they open long positions when the price retreats from recent peaks and sell the cryptocurrency when the price tests resistance levels.

When should a long position be opened?

Traders should go long when they expect the price of a cryptocurrency to increase.

You may be interested in going long when you feel the price of a cryptocurrency is about to go up for a while, depending on the time frame with which you are operating. For example, if you are trading on the daily chart and believe that the price will increase during the following days or even weeks, you can go long. You can either buy the asset on a spot exchange or open a long position via futures, options or other derivatives contracts.

Obviously, your decision must be backed by some kind of fundamental or technical analysis. For example, if you find out that a blockchain project has secured a high-profile partnership or is implementing an important upgrade, you might think about going long on its native token. Generally, you should be very active on social media and read news on a regular basis in order to accurately comprehend the market sentiment. Alternatively, or on top of that, you can look for patterns on the charts and check, for example, whether the price has broken above an important resistance line, which might indicate the extension of an uptrend.

No matter what kind of analysis you rely on, you should be confident that the price will go up if you plan to go long. Otherwise, you will end up going against the market.

Unlike foreign exchange pairs, which have no particular long-term target, cryptocurrencies act like company shares in the sense that they are usually traded against fiat currencies, particularly the U.S. dollar, and they always strive to go higher. This is why you will see many investors who prefer to stick to the “buy and hold” strategy, especially when it comes to Bitcoin.

When should traders go short?

Traders should go short when they expect the price of a cryptocurrency to decline.

You may be interested in going short on a particular cryptocurrency when you expect its price to decline for a while.

As explained above, you should back your decision with solid market analysis. As a rule, short-sellers open their positions when the market has reached an overbought level — i.e., it has increased for a long period and the uptrend might have supersaturated. Also, going short makes sense when the price cannot break a resistance level and starts departing from it.

Since the cryptocurrency market is still at an emerging stage, Bitcoin (BTC) and altcoins can often display sharp fluctuations without any fundamentals backing the moves, which makes the analysis process a bit tricky. However, you should always be aware of all the factors impacting the market before going long or short.

Where can you go long or short?

You can go long or short on any cryptocurrency exchange or trading platform.

You can open long and short positions on any cryptocurrency exchange that provides spot or derivatives trading services.

Traders usually opt for well-established platforms such as Coinbase or Binance, among others. Coinbase is the largest crypto exchange in the United States, while Binance is one of the fastest-growing crypto trading platforms in the world. It offers a wide range of services, including spot, futures, options and over-the-counter trading.

It’s worth mentioning that Coinbase and Binance, as well as other popular exchanges, might seem sophisticated for newcomers. If you are new to crypto trading and are seeking a more straightforward experience, you can look into Changelly PRO. While it offers multiple features, trading on Changelly PRO is simple due to its intuitive dashboards and a terminal. However, it’s not only for beginners — seasoned traders can also open long and short positions on Changelly PRO, as the terminal comes with many different tools and perks, including a multicurrency wallet, security layers and multiple order types, among other features.

How can margin trading amplify the targets of long and short positions?

Margin trading can magnify the potential results of long and short positions thanks to leverage — i.e., borrowed funds.

Going long or short might be lucrative, especially when the cryptocurrency is volatile. Still, professional traders prefer margin trading, as they can amplify potential profits by several times. However, the risks also increase by the same degree, which is why margin trading should be used with caution.

Margin trading involves trading with leverage, and it can be useful for both long and short positions. Margin accounts use funds provided by third parties — e.g., the exchange platform or other traders who are incentivized for contributing their funds. Thus, you can invest greater amounts by leveraging positions and magnify the potential profit by several times.

The required sum that you have to commit as a percentage of the total order amount is called margin, hence the name. As for the leverage, it represents the ratio of the borrowed funds to the margin. For example, if you want to open a long position worth $10,000 with 10-to-one leverage (or 10x leverage), you will have to invest $1,000 of your own money.

Margin trading is a method to boost the potential profits of your long and short positions.