Long and Short - Understanding the Basics of Trading in Both Directions

In the financial market, Long Position and Short Position are the main mechanisms that give traders the opportunity to profit in all market conditions, whether prices are floating upward or downward. Let’s take a deep dive into these two important orders.

Long Position - Belief in an Upward Movement

What is a Long Position

When a trader opens a Long Position, it means they are placing a buy order, believing that the price will move higher in the near future. The goal is to buy at a low price and sell at a higher price to capture the profit from the price difference.

This strategy aligns with an uptrend (Uptrend) market. Traders need to choose the right timing to enter the position. Note that Long Positions are not applicable to all asset types but are commonly used with derivatives (Derivatives) and futures contracts.

Practical Example of a Long Position

Suppose Mr. A receives news that PEAR company is expected to perform well next year. He believes the stock price will surge and decides to go Long by purchasing 100 PEAR shares at 350 baht per share (Total investment 35,000 baht).

Shortly after, public news reports that the stock price of PEAR has risen to 400 baht per share. Mr. A closes his position by selling all 100 shares, receiving a total of 40,000 baht. The profit is 5,000 baht.

However, if the price does not move as expected, for example, falling to 340 baht, the trader might need to close the position at a loss. This is the risk inherent in every trade.

Short Position - Profit from Price Decline

What is a Short Position

A Short Position is the opposite. The trader places a sell order before owning the asset, expecting the price to decline later. Then, they buy back at a lower price to close the position and realize a profit from the price difference.

Short Positions are suitable for a downtrend (Downtrend) market and allow traders to profit even when the market is weak. Note that Short Positions are not available for all assets; only certain instruments like CFDs and contracts with short-selling rights (such as Tfex) are permitted.

Practical Example of a Short Position

Suppose Mr. B receives news that a key raw material country for ORANGE company will cease exports. He predicts that ORANGE’s stock price will fall and decides to go Short by borrowing 100 ORANGE shares from a broker and selling them immediately at 350 baht per share (Received 35,000 baht).

Soon, the threatening news proves accurate, and ORANGE’s stock drops to 300 baht per share. Mr. B takes this opportunity to buy back 100 shares at 300 baht (Spending 30,000 baht) and returns the shares to the broker. He makes a profit of 5,000 baht (35,000 - 30,000).

Conversely, if ORANGE’s stock rises to 400 baht, Mr. B would have to buy back at a higher price, resulting in a loss. This illustrates why Short Positions carry significant risk and require good risk management.

Main Differences Between Long and Short

A Long Position is a bet that the market will improve; you wait for the price to fall to buy. A Short Position is a bet that the market will decline; you wait for the price to rise to sell. The most important point is that both strategies carry high risk and require careful planning with appropriate Stop Loss settings.

CFDs and Modern Tools

In today’s trading world, instruments like CFDs (Contracts for Difference) have made short selling much more convenient. No need for complicated steps like borrowing stocks from brokers. Traders can profit from both bullish and bearish markets with simple and fast procedures.

Caution: Derivatives and other leveraged instruments (Leverage) can lead to total loss. Study the risks carefully before deciding to trade.