Buying or short selling: long and short positions

For many beginners, making money in the markets means buying something that goes up. A trader can also profit when prices fall. Being able to take a position in either direction is one of the big differences between trading and traditional investing.

Going long: buy now, sell higher

Taking a long position, or going long, means buying an asset in the hope that its price will rise. You open the position with a buy and close it with a sell. Your profit is the difference between the sell price and the buy price, multiplied by the position size.

Going short: sell first, buy back later

Taking a short position, or going short, means selling an asset you do not own, in the hope of buying it back cheaper later. The order of operations is reversed: you open with a sell and close with a buy. This is also called short selling.

In forex, the idea comes naturally, because every pair sets two currencies against each other. Selling GBP/USD means selling pounds and buying dollars: you are betting on the pound falling against the dollar. On CFDs and futures, going short takes one click, exactly like buying.

Calculating the result both ways

The two formulas mirror each other. On a long position, you win when the exit price is above the entry price. On a short position, you win when it is below.

Do not forget the spread. A long position opens at the ask and closes at the bid. A short position opens at the bid and closes at the ask. Either way, you pay the gap between the two prices once per round trip.

Here is a full example with the spread. EUR/USD shows 1.0849 / 1.0850. If you buy, you get in at 1.0850 and your position is immediately at −1 pip, because you could only sell at 1.0849. If you sell, you get in at 1.0849, and to close you will have to buy back at the ask, which is 1.0850 at that moment. In both directions, you start with a small handicap equal to the spread.

What is specific to short selling

On a share bought without leverage, the maximum loss is known: the price cannot fall below zero, so you can only lose what you put in. On a short position, there is no theoretical ceiling, because a price can rise without limit. That is why a stop loss is even more essential when you are short.

• Financing costs: a short position held overnight incurs swap charges or credits, just like a long one. Whether you pay or receive depends on the interest rate gap between the two currencies or on the asset's benchmark rate.
• Dividends: if you are short a share or an index CFD when a dividend goes ex, the amount is usually debited from your account.
• Borrowing stock: in the cash equity market, short selling means borrowing the shares, which has a cost and can be restricted by the authorities during a crisis.
• Sudden moves higher: when many short sellers have to buy back at the same time, the price can shoot up very quickly. This is called a short squeeze.

Why you should know how to trade both ways

A trader who can only buy is either idle or fighting the market during every downturn. Knowing how to go short doubles your opportunities, as long as you apply the same risk management rules in both directions.

It also lets you hedge an existing exposure. An investor holding a portfolio of European shares could, for example, temporarily sell an index CFD to limit the impact of an expected drop, without selling the shares.

1. Define the direction of the trend before choosing long or short.
2. Place your stop on the right side: below the entry for a long, above it for a short.
3. Calculate your position size the same way in both cases.
4. Check the financing costs if you plan to hold the position for several days.