You can access both of our platforms from a single Saxo account.
What is long and short trading?
CFDs
Key takeaways:
- Long and short trading are two ways to express a market view: a long position may benefit if an asset’s value rises, while a short position may benefit if it falls. In both cases, profits are not guaranteed and losses are possible.
- Trading vs investing matters because investing usually means buying and holding the underlying asset, whereas trading can involve instruments that let you speculate on price movements without owning it. That flexibility is what can make going long and short possible across shares, indices, forex and commodities.
- To open a long position, you typically place a buy trade through a trading platform and aim to close it at a higher price than your entry level. What the position looks like in your account depends on the product, because owning the underlying asset differs from holding a derivative position such as a CFD.
- To open a short position, the mechanics depend on the product: physical share short-selling usually involves borrowing and selling shares first, while derivatives such as CFDs let you take a short position without owning the underlying asset. A short trade may profit if the price falls, but if the price rises, the position can generate losses.
- Long and short positions should be weighed against market conditions, trading preferences and risk management, including tools such as stop-loss orders and hedging. Short trades deserve particular caution because profit potential is limited by a price falling to zero, while the downside can be far greater if the market moves sharply against you.
Trading doesn’t have to be a one-way street. Specifically, you don’t always have to buy an asset and hope that its value increases so you can make a profit.
Thanks to short trading, you may make a profit when the value of an asset decreases, but losses are possible. This guide to long trades and short trades outlines how this process works and consideration you may want to make.
However, it’s important to remember that trading (including CFDs) involves significant risk. CFDs are complex, leveraged products and you can lose more than your initial deposit. They aren’t suitable for everyone.
A basic principle behind long and short
People participate in financial markets for different reasons, including investment, hedging, and speculation (which can involve seeking profit). To do this, a trader identifies an asset they believe may move in a certain direction.
This is intuitive when it comes to buying an asset outside of the financial markets. Let’s say, for example, you’ve bought property. Although it’s not always true, property prices have often risen over long periods in some countries, but this is not guaranteed.
Therefore, when you bought the property, you were doing so (in some capacity) because you expected its value to increase. This would give you a positive return on your investment, i.e. a profit, because you can sell for more than you paid.
This sort of value judgement is something we do each time we make certain purchases. The counter to buying property is a car. Some classic cars may appreciate in value but, in general, a new car will lose value.
This is something we consider before making a judgement on whether it’s worth buying based on the money you expect to lose vs. its utility.
What does this have to do with trading? When you enter the stock market, start forex trading, or trade commodities, you’re making similar value judgments. Your job is to assess whether the value of an asset will increase or decrease. Once you’ve made an assessment, you make a specific move. Those specific moves are taking long or short positions.
- Long positions are for the times you believe the asset’s value will increase.
- Short positions are for the times you believe the asset’s value will decrease.
That’s a basic overview of long and short trading. The point we’re getting at here is that the ultimate aim of trading is to assess the potential of an asset and, based on this, decide which direction its price will move. From that, you can open a trade with the hope you’ll make a profit.
Trading vs. investing
Let’s quickly talk about trading vs. investing before diving into long and short trades. We offer trading and investment options for a variety of financial instruments at Saxo Bank. Trading is one way to buy and sell financial instruments, but it’s not the only one. Investing is the other side of the coin. It's like trading, but it’s not entirely the same. Understanding the difference between trading and investing is important regarding going long and short.
Trading = The act of buying and selling financial instruments over shorter time horizons. Some trading involves derivatives where you don’t own the underlying asset.
Investing = The act of buying and holding assets, often over longer time horizons, with returns coming from price changes and/or income (for example, dividends or interest).
You can be ‘long’ an asset by owning it. Taking a short position typically involves using a product or mechanism that allows short selling (for example, stock borrowing, derivatives, or certain funds), and isn’t available in all accounts or jurisdictions. Buying the underlying asset means you own it and, just as it would be if you owned property, your fortunes are directly linked to its value. If the asset’s value increases from the point you invested, you’ll make a profit. If it decreases, you’ll lose money.
Some types of trading do not require you to purchase the underlying asset. This means you can speculate on its price movements. Having the ability to trade against price movements, instead of owning the underlying asset, means you can go long or short.
You can make long trades when you think the price will increase. You can make short trades when you think the price will decrease. That’s not usually possible when you simply buy and hold the underlying asset.
Defining long and short trades
We’ve given you a general overview of trading and how you can go long or short. To recap, going long is when you believe the value of an asset will increase. Going short is when you believe the value will decrease.
These are simple concepts to grasp. The question though, is how do you open long trades and short trades?
How to open a long position
Through a trading platform, you can open long or short positions using different instruments (including CFDs, where available), across markets such as shares, indices, forex and commodities.
In this context, you are opening a position that may benefit if the price rises. Your goal is to hold the buy position until the asset’s value increases. If the price increases and you close the position above your entry level, you may make a profit after costs.
The asset’s value won’t always increase which means you won’t always make a profit on long trades. The same is true for short trades. Nothing is guaranteed in trading. However, when you open a buy position, you’re doing this intending to sell once the asset’s value has increased.
What does a long trade look like in your account?
Taking a long position means you’re buying the asset. What a long position looks like in your account depends on the product. If you buy the underlying asset, it will typically appear as a holding in your account. For derivatives such as CFDs, your account typically shows a position in the instrument (not ownership of physical assets such as oil barrels).
If you buy the underlying asset, the holding typically appears in your account and the purchase value is reflected in your cash balance. Margin and derivative positions may appear differently. This contrasts with the way short trades are shown on your account, as we’ve explained in the next section.
How to open a short position
Short positions can allow you to profit if an asset’s value falls, although losses are possible if the price rises. How a short position works depends on the product. In physical share short-selling, this typically involves borrowing shares from a broker and selling them at the current market price. If the price falls, you may be able to buy the shares back at a lower price, return them to the lender, and keep the difference as profit before costs and fees. With derivatives such as CFDs, the mechanics are different, and you typically take a short position without owning or borrowing the underlying asset.
For example, let’s say you open a physical share short position on Tesla stock when the price is $100. If the price falls to $90 and you close your position, you buy the shares back at the lower price and return them to the lender. In this example, the difference is $10 per share, which would be your profit before costs and fees.
If Tesla shares rise in value instead and you hold a short position, you would make a loss. For example, if you open the short trade at $100 and close the position at $110, you would incur a loss of $10 per share, excluding any additional costs and fees.
What does a short trade look like in your account?
Continuing the physical share short-selling example above, you have borrowed and sold the stock. How a short position appears in your account depends on the product, account type and market. In physical share short-selling, sale proceeds and the borrowed position are typically reflected in the account, but those amounts may be subject to restrictions and margin requirements.
When you close that physical share short position, the borrowed shares are returned and your account is adjusted accordingly. Any profit or loss will depend on the difference between the opening and closing prices, after costs, fees and any applicable financing or borrowing charges.
Caution: Short trades have limited potential but unlimited risk
Going short can be a good move if the market conditions are right. However, if you’re going to make short trades, you need to understand that your potential profit is limited because the asset price cannot fall below zero.
Short-selling rules can vary by market and may restrict short selling in certain conditions (for example, after sharp declines).
What’s not limited, however, is the potential downside. The price of an asset isn’t subject to any limits. This means you could open a short position and the value of the asset could go on a major bull run. If the price increases too much, you may be forced to close the position at a large loss and, depending on the product and leverage used, losses can exceed your initial outlay.
One way to help manage this risk is by using a stop-loss order. A stop-loss order lets you set a price level at which an order to close your position is triggered. You set this before you open the trade. A stop-loss order can help limit losses, but in fast-moving markets it may execute at a worse price than expected due to gaps or slippage. If you set a stop-loss at a level equivalent to a 10% loss, an order to close the trade will usually be triggered when that level is reached, but the execution price may be worse than expected.
Should you go long or short in trading?
Going long or short depends on a variety of factors, including your personal trading preferences and market conditions. Only you know whether you prefer long trades or short trades. Assessing market conditions requires you to read the latest financial news, review market commentary and research, and carry out various forms of analysis, including technical analysis and fundamental analysis.
Sometimes the indicators suggest a long position is best. There may be times when a short position is best. There may even be times when taking both positions is useful. Holding long and short positions at the same time is known as hedging.
You’re using one position to counteract the other during times of high volatility. Hedging can be short-term or longer-term, depending on the objective.
The bottom line here is that trading gives you the ability to go long or short on financial instruments. The decision on which position you take at any point in time is yours. It’s important to understand that you may not make a profit.
Trading carries a certain amount of risk, and the value of an asset can increase or decrease. It’s generally important to understand the risks and only trade with money you can afford to lose.
However, along with these risks come potential rewards. A long position may benefit if the price rises and a short position may benefit if the price falls, but trading costs, execution and market moves mean profits are not guaranteed.
Ultimately, many traders use a combination of analysis tools and market information before they make a final call. We have a variety of resources at Saxo Bank to help you assess the markets and make decisions.