Thursday, October 22, 2020

Long and short positions, explained

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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.

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