Taking a long vs short position: which should I use?

What are ‘going long’ and ‘going short’?

When you want to get exposure to an underlying asset, you’ll have to decide between going long or going short. This decision is supported by how bullish or bearish you feel about the direction that the asset will take.

If you’re bullish, you think the market price will rise. You’ll subsequently take a long position by buying the asset with the aim to sell at a higher price.

If you’re bearish, you believe that the market will fall. Thus, you’ll take a short position by borrowing and selling the underlying asset and buying it back at a lower price. Whether you go long (buy) or short (sell), you’ll make a profit if your prediction is correct. Similarly, you’ll incur loss if the market moves against your prediction.

What is long selling?

Long selling is a term some people use to describe a long position, also known as ‘buying’. You’ll do this when you believe that the underlying asset’s price will rise.

For instance, if you expect the stock price of Tesla to go up after an upcoming announcement about a change in management takes place, you can go long by buying stock and selling it at a higher price for a profit.

What’s short selling?

Short selling, also known as ‘selling’ or ‘going short’, is a term that describes the position you’ll take when you think that an asset’s price will fall. The common approach to short-selling involves selling a borrowed asset in anticipation that the price will fall, and then buying it back later for a profit to return it to the lender.

For example, if you expect a pending investigation into a company to affect the stock price, you can go short by selling it. You’ll borrow the stock, sell it and then repurchase it at a lower price point to return them to the lender.

What is the difference between a long position and short position?

The difference between a long position and a short position is the direction of the market assumption. On one side, you have the choice of going long (buy) when your trading plan provides evidence that the market price of an asset will rise. On the other side, you can go short (sell) when your strategy suggests that it’ll fall.

Since these positions are juxtaposed, they offer traders and investors the opportunity to hedge against any potential negative movements in the market. Hedging involves taking a position against your initial prediction to reduce or limit the risk of loss. Note that it doesn’t prevent the risk of incurring loss entirely.

Here’s a brief comparison of how going long and going short differ:

When do I go long or go short?

You’ll go long when you believe that the market price will rise and go short if you think it’ll fall. Typically, the research that instructs your trading plan will determine whether you should go long or short when getting exposure to an underlying asset.

With us, you can take long or short positions on shares, and you can also get exposure to many other financial markets, such as forex, commodities and indices.

When economic events occur that affect your initial prediction and the market moves against you, you may hedge your position to mitigate any further losses. If you hedge your position using contracts for difference (CFDs), you may offset any losses against profits for tax purposes.¹

How to take a long or short position

Explore how you can take long or short position with us:

1. Choose your preferred market
2. Decide whether you think the price will rise or fall
3. Open an account or practise on a demo
4. Select ‘buy’ to go long, ‘sell’ to go short
5. Choose your position size and manage your risk
6. Place your deal and monitor your trade

Choose your preferred market

There are over 18,000 markets that you can choose from with us. You’ll need to identify a market that you’re familiar with before you get exposure. You’ll get to trade 24/7, with out-of-hours trading available on more than 70 US shares, and get access to low spreads.

Decide whether you think the price will rise or fall

Perform thorough research to determine whether the asset price will either rise or fall. If market history and current conditions support that the price will rise, you’ll take a long position. Conversely, if you think that the price will fall, you’ll take a short position.

Open an account or practise on a demo

When you open an account and trade with us, you’ll be able to go long or short using CFDs. Using these derivatives, you won’t take ownership of the underlying asset, but only speculate on the price rising or falling.

Note that leverage products magnify both your profit and loss because it’ll be calculated based on the full size of the position, not the deposit. That’s why its important to take steps to manage your risk.

You could practise and sharpen your trading skills on a risk-free environment by creating a demo account with us.

Select ‘buy’ to go long, or ‘sell’ to go short

Open a deal ticket and choose whether to go long or go short. When trading with derivatives, you can get exposure with just a fraction of the full value of the trade as your deposit. This is called trading with leverage. Note that leverage will magnify your potential profit and loss, so there’s potential for you to lose more than your initial cash outlay. Always manage your risk carefully.

Choose your position size and manage your risk

Input the position size that you’re comfortable risking and potentially losing if the market moves against you. To manage your risk, you’ll need to set a stop and limit order to your trade. Remember that this doesn’t prevent the risk of slippage, as the market may move faster than it takes to close the position.

Place your deal and monitor your trade

Once you’re done setting up risk management, you can place your trade. Keep an eye on your trade to find out if your prediction is coming to fruition. You can set up trading alerts so that you’re notified if there’s any changes in market events. Note that it’s your responsibility to monitor your trades, and not rely solely on alerts for any updates on your position.

Going long vs going short summed up

• Going long or short are two opposite sides of a trade in which one involves buying the underlying asset while the other side includes borrowing and selling it
• When you go long, you believe that the market price will rise so you buy the financial asset with the aim of selling it at a higher price
• If you go short, you believe that the market price will fall and subsequently borrow the underlying asset to sell, then buy it back at a lower price to return it to the lender
• You can take a long or short position on different markets including shares, indices, commodities and forex
• With us, you can go long or short on your chosen market via CFD trading

Footnotes:

¹ Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.