What are the differences between crypto long and short positions in trading? You may be learning a lot of basic terms used by day traders in the crypto market but there are several other terms that will take some time to understand fully and also use them correctly.
Two such terms are ‘long’ and ‘short.’ If you are not sure about them, do not worry because you are not the only one out there.
There are several other new crypto traders who get confused by these two terms.
This is the right place to know more about them because this article will tell you all about it.
Ideally, the term ‘long’ in crypto refers to your position.
A long trade is initiated when you purchase a crypto asset with an expectation that the price of it will rise in the future when you would sell it off to make a profit.
On the other hand, a ‘short’ trade refers to the position that is initiated by borrowing a crypto asset though the primary intention remains the same – to sell it but with an intention to repurchase it when the price of the same falls.
You then take the profit and give back the shares to the lender.
In crypto trading, a long and short trade is made especially in day trading and is initiated with either a purchase or a sale.
In a long trade the terms ‘long’ and ‘buy’ are used interchangeably while in a short trade the terms ‘short’ and ‘sell’ are used interchangeably.
Both these terms are by nature pretty antagonistic because a long trade typically generates profits while a short trade depletes the balance of the digital asset.
10 Differences Between Crypto Long and Short Positions in Trading
If you want to differentiate between the terms ‘long’ and ‘short’ in crypto trading, you will need to understand the core concepts of crypto trading positions.
This is specifically required by the newcomers to the crypto scene since they are expected to inundate the crypto marketplace in the near future.
You may feel that the concept of long and short trade is pretty simple but you will be proven wrong if you do not know the principles behind these two forms of trading.
Therefore, go through this article to make sure that you do not mess up your trading strategies and make profits in the end.
A long position in crypto refers to the buy orders. These orders are placed by a trader who wants to make profit from the rising prices of the crypto assets in the market.
Here the entry action involves buying the particular crypto asset and holding it in anticipation that the price will rise in the future and you can sell to get more than what you paid for it.
On the other hand, a short position in crypto refers to the sell orders. These orders are normally placed in the bearish markets.
In order to initiate a short trade, you simply borrow the asset and sell it after waiting for the price of it to fall down.
2. Call and Put
In long trades, you can buy a long Call to get the right to buy the asset by making another trader sell it to you at a particular price.
And, you can buy a long Put to have the right to sell the asset by making another trader buy it from you at a definite price.
In these cases you can use a stop loss order that will keep you from losing from your trade too much provided the prices move drastically against you.
In short trades, you can buy a short Call to get the right to sell the asset or make another trader buy it from you at a specific price.
And, you can buy a short Put if you want to have the right to buy an asset or make some other trader sell it to you at a particular price.
In this case, you can also use the stop loss order to prevent you from incurring a huge loss on your trade if the price does not move in your favor.
As for the time, you should ideally go short on your trade when you expect the price of the crypto asset will fall. It could be days or weeks when you should open a short position.
You can do it by either selling Bitcoin for fiat and then again buy it when the price falls or via options, futures, Contracts For Difference, or any other derivatives.
On the other hand, you should choose to go for long trades in a bullish market and if you open long positions during rallies you will be able to gain maximum profits.
If you are a day trader, you should wait till the price of the asset reaches the oversold level of the Relative Strength Index or the Stochastic RSI.
4. Things to Do Before
Before you open a short position, it is needless to say that you should analyze the market properly first and then make your decision.
If you are a day trader, you should use both fundamental and technical analysis for that matter. You should also check the viability of a project, especially if you are going for a DeFi project.
Ideally, you should choose a project that has some well-established firms and blockchain investors as partners.
Also, check the market sentiment on the news sites as well as on the social media and follow several indicators and chart patterns to analyze the price action of the coin itself.
On the other hand, before you open a long position, you should do proper market analysis once again. If the price movement is not in your favor, you should wait till it breaks above strong resistance.
You may however go long during any ongoing rally provided you are sure that it is going to last for a while.
If you are a wealthy investor you can simply buy and hold the crypto asset for months or even years with an expectation that the price of it will rise further in spite of the adjustments and corrections made in the market.
And, buy traders should use different chart patterns such as the Inverse Head and Shoulders, Double Bottom, Ascending Triangle, or Hammer before going long and also use bullish candlestick patterns such as Dragonfly Doji and Hammer.
5. Things to Do After
There are also a few things that you should do after you go long or short on your trade.
For a short position, you can anticipate whether there will be a downtrend or a price correction by analyzing specific bearish candlestick patterns such as the Hanging Man, Gravestone Doji, and the Shooting Star.
You may also use bearish chart patterns such as Head and Shoulders, Double Tops, and Triple Tops among others.
On the other hand, after you open a long position, you should take into account all those specific factors that may make a difference in the current trend.
This is very important because the crypto market is not as mature as the equity market or foreign exchange market.
Therefore, technical analysis alone may not always suffice and may also result in a price difference that will take you by surprise.
Traders who prefer long positions are often referred to as passive investors. This is because they typically hold their assets for over a year and do not buy or sell them over a short period. They usually follow the ‘buy it and forget it’ method.
On the other hand, traders who prefer short positions typically hold their crypto assets for a very short time and are referred to as active investors.
They may even be referred to as active traders because they tend to buy and sell the crypto assets several times within a year, a month, or even a day.
Their primary objective is to make maximum profits from their investments by timing their moves precisely with the price movements of the assets rather than holding on to their coins.
7. Strategies to Follow
The strategies to follow when you open a long or short position while trading your crypto coins are also different.
In the case of long positions, though the overall trading concept is to ‘Buy and Hold,’ the different strategies that you may follow include:
- Value Investing – This is when you buy a coin when it is available for less than it is worth.
- Growth Investing – This is when you invest in assets that you think will outperform the other crypto coins available in the market.
On the other hand, the common strategies that you may follow for opening a short position include:
- Scalping – This is when you buy and sell your crypto assets very quickly within the same day.
- Day Trading – This is when you actively follow the price movements of the coins in a day to make small profits which will add up to a considerably large amount in the end.
- Swing Trading – This is when you hold the coins for a few days or months to make the best out of your trade without needing to devote a lot of time.
Just make sure that the strategy you choose suits you and your trading style and in the end meets all your needs.
The advantages of long trade are that you will not need to pay high fees on your trades and you will also not have to put a lot of effort and struggle with your trading strategies.
Also, you can make a lot of money in this form of trade which involves little or no emotions. Most importantly, in long trades you will not need to stay abreast with the latest news and happenings surrounding the crypto market.
On the other hand, the advantages of going short include making passive income within a very short time.
You will get to trade with more active traders and also be well versed about the crypto market, the value of the crypto assets, and the price movements. All these will make you a more informed and more confident crypto trader.
As for the downsides of long trades, you will find it pretty difficult to predict the future of a coin and therefore there is a high chance that you may lose a large amount of money in case your prediction goes wrong and the market starts moving in the opposite direction.
On the other hand, the most significant disadvantage of a short trade is that it has a lot of requirements which you need to meet and it also comes with some additional risks and restrictions in comparison to long trades.
10. Some Other Differences
Here are some other differences between long and short trades for you to know.
A short trade typically leverages the current trends and recent events that take place in the crypto market.
The users therefore simply have to be knowledgeable about these trends and stay abreast with the latest happenings to make their trading decisions and build the right strategy based on the findings.
This is not possible in the case of long trades because the trends tend to change pretty quickly over time.
Another significant point of difference is that short trades need less capital and make profits from it. This saves them from risking a larger amount of capital which is typically needed for going long on crypto trades.
And, the volatile nature of the market does not guarantee that this capital will be saved from being lost entirely if you go long. In short trades, if things turn out to be in favor, you can upgrade your capital depending on your budget.
Moreover, the crypto market being active, broad, and dynamic, the traders going short find it to be more reliable than those who go long on their trades. They can make their investments anytime to boost their incomes.
The traders who go short can also make immediate reinvestments with their profit earned. On the other hand, if you go long you will need to hold your assets and lock them up for a specific period and not get any return till the end of the tenure.
And, finally, short traders do not need to spend a lot of time and go through the hassles of doing any extensive research to find out more about the offerings of a platform, which is a part and parcel of any type of investment journey.
All you will need to do is know the basic information to start and carry on with your trading activities.
Which is Better – Crypto Long or Short Positions?
Both long and short trades are excellent strategies to follow in the crypto space to make a large number of small profits over time.
However, both these strategies come with their unique characteristics, features, pros, and cons.
This makes it really difficult to choose which among them is better for all to follow.
Moreover, every trader and investor has different needs, risk appetite, and preferences which make things all the more difficult.
Therefore, instead of trying to find out which among long and short crypto trading is better and wasting time and effort, you should focus on choosing the right form of trading for yourself.
For that, you will not only need to know the differences between these two trading forms but also a few other important facts which follow.
Selling short, commonly known as shorting, may allow you to make profits when the market moves up and down.
You can do it all through the day when you notice any price movements, not necessarily in the direction that you want.
As long as the price is moving, you can short sell.
On the other hand, in short trades you will be able to make profits depending on the amount you paid.
However, the risks in it are unlimited because the price of the asset may rise indefinitely.
You can mitigate your losses when you are short by buying options which are the same as the stop loss order but the options are only used when you are short, which can be a short call, a stop loss, and a short put.
Since short trades typically generate profits when you bet against a crypto asset, most people go for it.
Typically, when you sell a crypto coin, you actually purchase the quote currency. This can be a crypto coin or a fiat currency.
This means that when you sell Bitcoin, you actually buy USDT or some other Altcoin, US Dollars or any other fiat currency.
Few crypto traders prefer to go short on their trade when the price moves further than the reliable support level.
This is quite a productive move especially when the price is trading within the channel for sometime whether it is bearish, bullish, or horizontal.
It is also true that you can also go short on your position by simply leveraging the price movements within the channel itself so that you do not have to wait till it breaks out.
Instead, when you do so when the price touches the resistance level of the channel and hope that it will do the same again in order to check the support level.
No matter whichever way you prefer and whatever analysis you do, you should be confident about the price to decline if you intend to open a short position.
If you are not confident with your move then in most of the times you will find yourself trading in opposition to the market.
And, if you choose to go short on your trade, you should also make proper plans to mitigate the risks involved in it.
You will be better off if you have a long-term investing portfolio as well along with it somewhere else.
There are also a few other considerations to make if you want to go short on your crypto trades.
The prices of assets may fall a bit too quickly especially when this type of trade is made on a large scale.
It is for this reason that the Securities and Exchange Commission or SEC imposed an alternative uptick rule in 2010.
This rule prevents short selling from driving the prices of assets down any further than 10% or more in a day as compared to its preceding closing price.
In addition to that, the SEC has also issued several warnings about shorting based on the information available on the news outlet, on social media, and websites so that retail and average investors are kept from being manipulated.
However, more people are interested in going short rather than long on their trades because it generates more profit and there are several reasons for that.
Therefore, summarizing all the facts and information above, it can be said that you can go either long or short on your trade without needing to actually buy or sell the crypto coins.
You will also get a good exposure to the crypto space when you go long or short with your positions.
Typically, in a Bull market you will see a lot of long positions rather than short because there are more traders and investors involved in it who want to make maximum benefit from the price swings.
On the other hand, in a Bear market, there are more short positions than the long ones.
A long trade will help you to diversify your crypto portfolio and also grow it.
This is primarily due to the benefits provided by the blockchain technology which has a positive impact on the prices of the crypto coins.
It is also worthy to take note of the fact that if you want to meet your immediate crypto goals and get faster potential returns a short trade will be the best approach to follow.
This is because you will be aware of the risk-reward ratio which is quite clear in this form of trading.
However, you must keep in mind that experimenting too much in a short time should be avoided at all cost because there is a high chance that your entire capital might be wiped out.
Also, in the case of long trades, you will be better off if you place a small buy.
This is because you will then get multifold returns over a long period of time.
Both long and short positions are good to provide you the desired returns on your investment being the essence of trading. However, to get things right, articles like this will be helpful to know the differences between them and plan accordingly.