What Are Short and Long Trades?

First, you need to familiarize yourself with the terms. The slang of cryptocurrency traders is the same as in the stock market or other financial markets; the terminology is the same everywhere.

Long trades or "long positions" are trades to buy an asset. Everything is simple here. You buy an instrument cheaply, expect the price to go up, and then sell it. The difference between the buy and sell levels, minus the commission, is the trader's profit.

If everything is simple with long trades, then the answer to the question of what short is is more complicated. A short trade or a "short position" is an opportunity to make money by selling an asset, that is, by depreciating. The essence of a short position is that a trader takes an asset "on loan" from a broker or a cryptocurrency exchange at the peak of its value. After a price decrease, the trader buys an asset cheaper, returns it to a broker or exchange, and the difference between the rates is a profit.

Speaking about what are short and long trades, it is also important to consider the term "margin trading." It can be used to open both long and short positions. Margin trading allows you to increase the transaction amount at the expense of borrowed funds. In this case, the trader must have a certain amount (margin) on deposit, which guarantees them the fulfillment of obligations. If the amount becomes too small, a warning is first triggered (Margin Call), and in case of an unsuccessful outcome, the transaction is automatically closed (Stop Out).

However, the trader can significantly increase their deposit if the transaction is successful. Leverage helps them with this. Leverage is a coefficient that increases the user's deposit available for a transaction. If the price moves in the right direction, your profit will grow faster. The minimum leverage is 1:2; the maximum is limited by the exchange. The standard is 1:100, but it can be more.

An important fact about margin trading is that when using it, the trader will not own the cryptocurrency. Only profit will be credited to the account, or the loss will be written off. You need spot trading if you want to buy exactly crypto with enrollment to a crypto wallet.

Longing and shorting cryptocurrencies are reverse trades. Their key features are as follows:

• A long position is profitable when the asset rises in price. A short position is profitable when the asset becomes cheaper.

• The ratio of shorts and longs of bitcoin determines the trend. If there are more short trades and their volume is higher, then, accordingly, the price will go down. If there are more long trades and their volume is higher, the price will rise.

• Long trades are more suitable for beginners as they are easier. Working with short positions requires experience and good market knowledge, so it is better suited for traders who have worked a lot with digital assets.

The choice of direction for opening a deal is individual each time and depends on a number of factors.

Now you understand how long and short trades work on the exchange. But how to determine the direction? A trading strategy helps a trader decide in which direction to open a position. If you are starting out in trading, you need to develop a system; without it, trading will not be profitable in the long run. The strategy can be based on two types of analysis:

• Fundamental. As a rule, it is used for long-term transactions. At the same time, fundamental indicators are evaluated, such as market capitalization, the number and amount of transactions for a certain period, mining activity, and many other indicators.

• Technical. It is used for short-term transactions. The key goal is to detect patterns on the chart that may indicate the emergence, extinction of a trend, correction, etc. For technical analysis, graphical tools are used, as well as indicators.

You need to work strictly in accordance with your strategy, and discipline is extremely important in this. The strategy should provide clear entry and exit points for the transaction, the principles of setting goals, and the rules for calculating Take Profit and Stop Loss orders if the cryptocurrency exchange allows them to be used.

Another important aspect that traders need to know is what hedging is. This is a strategy that allows you to diversify risks. As a rule, it is used if the trend is going in your direction. Still, there is a possibility of a correction or the risk of a complete cessation of the trend.

Hedging involves opening a trade in the other direction without closing the previous order. For example, you have a long trade open, and you additionally open a short trade (for example, using futures contracts). This is done so that the trader can not lose the already earned profit in case of unfavorable situation development.

Hedging is an effective way to diversify risks, but it only works for long-term trades that last at least a few weeks. In short-term trading (scalping, intraday trading), this method of risk protection is ineffective. But if you are investing for the long term, then hedging will help you "wait out" periods of instability and exit the trade in time without allowing losses in profits.