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Long or short? That is the question. When it comes to trading, we call long positions the buy orders that are placed by traders who want to benefit from the ascending price of an asset — in this case, cryptocurrencies. On the flip side, short positions are sell orders that are typically placed in bearish markets.
While the concept of long and short is simple, understanding the principles behind long vs. short trading is imperative for every trader.
Long and short positions suggest the two potential directions of the price required to secure a profit. Traders who go long expect the price to go up from a given point. Those who go short hope that the price will decline from the entry point.
Going long is also equivalent to buying the cryptocurrency or opening a long position, while going short is equivalent to selling the cryptocurrency.
In a long position, the crypto trader has purchased a virtual currency and is waiting to sell when its price moves higher. Some traders are inclined to go long more often than going short. We call such traders bulls, as they try to benefit from bullish markets.
This is especially true for the cryptocurrency market, which is usually headed toward expansion. If you check larger time frames, Bitcoin — the largest digital currency by market cap — has been forming higher highs since its release more than a decade ago.
At the beginning of 2021, it updated the all-time high. This is also true for most virtual currencies, which benefit from general bullishness. Thus, it happens very often that short sellers are trading against the market.
However, even though the crypto market is gradually expanding, it displays major corrections after almost every rally, so there is plenty of room for bearish investors as well. Those who go short are betting against the cryptocurrency, and expect its price to decline.
The concept of long and short positions is universal and works for all markets and assets. Moreover, it can be integrated with hybrid investment products like derivatives, which are tradable instruments that track the price of an underlying asset.
Thus, derivatives allow you to go long on a given asset without actually owning it. For example, futures exchanges let you leverage the fluctuations in the Bitcoin price without buying or selling the cryptocurrency. You can think of derivatives as a form of betting on the price of an asset.
Traders can mix long and short to create reliable hedging strategies that can minimize potential losses.
Short and long positions are antagonistic in nature. When a long trade is generating profits, a short trade on the same digital asset is depleting the balance.
Also, the psychology of bulls and bears differs in the sense that bears tend to be more conservative, while bulls like to risk and experience new strategies. However, these are only stereotypes. Short sellers are also taking risks during bullish markets.
Understanding Short Position
As mentioned, short trades are the ones that generate profits when you bet against a cryptocurrency. Generally, when you sell a cryptocurrency, you buy the quote currency, whether it’s fiat or crypto. Thus, if you sell Bitcoin, you buy US dollars, USDT, or any other altcoin or fiat currency.
Traders should go short when they expect the price of a digital currency to go down. For instance, if you are a day trader and feel that the price of Bitcoin will decline during the following days or even weeks, you would be interested in opening a short position. You can either sell Bitcoin for fiat and then buy it at a lower price or go short via futures, options, contracts for difference (CFDs), or other derivatives.
Before Opening a Short Position
Needless to say, you should first analyze the market and then make a decision. Day traders should rely on both technical and fundamental analysis. If you trade a DeFi token, you may want to check whether the project is viable, has secured investments from well-known blockchain investors, or perhaps has partnered with well-established firms.
You can check the sentiment on social media and news sites. Besides conducting fundamental analysis, you can analyze the price action itself. You can use indicators and look for chart patterns.
After Opening a Short Position
There are certain chart patterns and candlestick patterns that anticipate a price correction or downtrend. Some examples of bearish chart patterns are the Double Tops, Head and Shoulders, and Triple Tops, among others. As for bearish candles, you should look for the Hanging Man, Shooting Star, and the Gravestone Doji.
Some traders prefer to go short when the price of a cryptocurrency breaks below a reliable support level. This is especially relevant if the price has been trading within a channel for a while, whether the channel is bullish, bearish, or horizontal.
Alternatively, you can go short by leveraging the price swings inside the channel itself. Thus, you don’t have to wait for a breakout. Instead, when the price is touching the resistance of a channel, you can go short with the hope that the price will go to test the support level again.
Irrespective of the kind of analysis you prefer, you have to feel confident that the price will decline if you plan to open a short position. Otherwise, you will find yourself trading against the market.
Understanding Long Trades
If the market is bullish, traders would be interested in going long. Opening long positions can generate considerable profits during rallies, like the one we saw at the end of 2017 or the current long-term rally that started in November of 2020.
Before Opening a Long Position
As explained earlier, you should make sure to back your move with reliable market analysis. You can wait until the price breaks above a strong resistance or go long during the ongoing rally with the hope that it will continue for a while.
Another approach preferred by wealthy investors is to simply buy and hold the cryptocurrency. In this case, they are not trading it actively, but simply holding it for months or even years with the expectation that the cryptocurrency will increase in value despite corrections and adjustments.
This strategy requires large deposits and is not suitable for retail traders who seek to speculate on the short-term fluctuations of Bitcoin and altcoins. On a side note, large traders defy current market trends as they buy the dip and sell the rip, meaning that they go long when the price is correcting.
Day traders may wait until the price touches the oversold level of the Relative Strength Index (RSI) or Stochastic RSI to go long.
Otherwise, buy traders can use chart patterns, such as the Double Bottom, Inverse Head and Shoulders, Ascending Triangle, or Hammer. There are also bullish candlestick patterns, including the Hammer and Dragonfly Doji.
After Opening a Long Position
Keep in mind that the cryptocurrency market is not mature compared to foreign exchange or equities. Hence, the technical analysis might not work that well, as the price can often take you by surprise. Still, you should consider all factors that can make a difference in the trend.
The good news for bullish traders is that unlike forex pairs, which have no specific long-term target, digital currencies act like company stocks. They are mostly traded against the US dollar and tend to move higher.
Yes. Traders go long and short in all markets. In fact, this is the very definition of trading, so you can’t do otherwise, irrespective of the market.
If you trade derivatives, there are more complex forms of long and short. For example, if you trade options, you use several combinations of long and short.
Options are contracts that give holders the right (but not the obligation) to buy or sell an underlying asset at a predetermined strike price, on a specific date or prior to it. They are quite popular in all financial markets. As a rule, traders use call options to go long and put options to go short.
However, they can also mix these. For example, traders can short-call positions as well as put positions. If you short a call option, you are bearish on the outcome of that specific call option, which is bullish. Therefore, it means you are bearish on the price of the underlying asset. In a similar fashion, you can go long on both call and put options.
Long and short positions are the essence of trading, and traders strive to understand the forming trends in order to make the right decisions. Still, going long or short is only half of the job, as finding the best entry point is also very important.
Last but not least, some crypto exchanges provide margin trading, which can greatly amplify the targets of long and short positions. However, you should be aware that the risk when using leverage is higher than when trading with your funds alone.
This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.