Beginners entering the foray of cryptocurrency trading often seem ignorant of the jargon peculiar to the trade – whether stock, commodity or cryptocurrency. Though two very commonly used terms in the context of trading at a cryptocurrency exchange, long trade and short trade are either misunderstood or confused with those prevalent in financial matters. In the financial sector, long and short refer to the duration of the term for which investments are made. Whereas, In trading long and short positions are more a decision related to the buy and sell of cryptocurrencies in response to the price movements i.e. whether the trader believes a currency will fall or rise in value. Let’s have a look.
The ‘Long’ and ‘Short’ of Trading
Cryptocurrencies are a highly volatile asset class. Crypto traders can witness price fluctuations of up to 15% in Bitcoin being traded on any bitcoin exchange on any regular day. The unpredictability and volatility drive traders to invest in cryptocurrencies and take advantage of the price changes to earn profits. Amidst such unpredictability, an investor can earn from both falling and rising markets by using spot and margin trading at trusted crypto exchanges such as WazirX.
When the trader hopes that the price of a cryptocurrency will increase in the future from a given point of time, the trader buys the cryptocurrency. This is called long trade, or we can simply say that the trader ‘goes long’. A long position implies that a trader would buy a coin at a low price and sell it at a high price to earn a profit.
Traders intending to go long should wait for the price to break above a strong resistance or should long trade during an ongoing rally in the hope that it will continue. Another approach is to buy and hold cryptocurrency for a long duration. This strategy is unfeasible for day traders who hope to earn profits by speculating fluctuations. Day traders can opt to wait until the price of the cryptocurrency touches the oversold level with reference to the Relative Strength Index (RSI).
When the trader either believes that the market of the cryptocurrency has reached saturation or that its prices will fall in the ,future, they ‘short sell’ the cryptocurrency. This is called short trade or simply, a short position or ‘going short’. The thing that needs to be understood here is that the trader would borrow (and not buy) the cryptocurrency from a broker whose price he believes would fall. He then sells the cryptocurrency to buy it later at a lower price. This difference is what the trader earns as a profit.
A long trade is quite straightforward, but beginners need to understand the ergonomics of a short trade. When a trader short sells, they are actually buying the quote currency. For instance, When someone sells bitcoin they buy US Dollars or any other paired cryptocurrency. Therefore, when the price of the cryptocurrencies are expected to fall, traders should go short and buy back later when their prices fall.
The Ratio of Short and Long Trade in a Trading Portfolio
Usually, an investor forms a long or short strategy to hedge funds. But an increasing number of investors are using this approach to increase their profits and diversify their portfolio. Traders can mix long trade and short trade while dealing at any bitcoin exchange or cryptocurrency exchange to create a hedging strategy favorable to their risk profile and minimize losses.
Conventionally, traders are either bulls or bears. A bull is generally considered a risk-taker, while a bear is supposed to be averse to risk. It is notable here that crypto traders break these stereotypes when they short sell (or risk it!) during bullish markets to earn profits.
It is not even necessary for a trader to buy or sell cryptocurrency to go long or short. Several cryptocurrency exchanges in India offer crypto derivatives in the form of futures, options, contracts for difference (CFD), and other such derivatives products. Thus, the traders can get exposure to long trade and short trade without actually owning or dealing in the cryptocurrencies physically while trading at these exchanges.
The Right Time for Long and Short Positions
Crypto traders are inclined to go for long trades more, showing bullish tendencies equivalent to that of the cryptocurrency market. The cryptocurrency market is rapidly expanding globally as investors ( Elon Musk did it too!) and traders continue to show their trust in Bitcoin and other cryptocurrencies. 2021 saw Bitcoin prices rising to an all-time high. Amidst the expansion and rising prices, corrections continue to surface, which gives plenty of space to the short trade.
It is thought that bullish markets invoke long trading while the bearish phase in a cryptocurrency market pushes investors to open a short position. This isn’t true at all times. Most cryptocurrencies benefit from bullishness. Thus, Bearish investors-trading short- bet against the cryptocurrency market as they expect the prices to decline. Long and short trading happens irrespective of whatever phase a market is undergoing and functions in a universal way for all kinds of assets and markets. Further, by using derivatives, crypto traders can combine long and short trading to leverage the fluctuations in the prices of Bitcoin and other cryptocurrencies.
What to Keep in Mind?
A thorough technical and fundamental analysis of the market is necessitated before the traders make any decision. Therefore, the crypto traders need to inform and educate themselves about market trends, company profile, and the history of growth and decline of the relevant cryptocurrency in which they are eager to trade. User sentiments on social media platforms, discussion portals such as Reddit, etc, and news sites are other sources to gather information.
After opening a particular position, a trader can also look at the price charts to note the patterns and indicators that forecast a rise or fall in price.
Margin Trading at WazirX: Amplify your Long and Short Positions
Margin trading, via leverage from borrowed funds, holds the potential to amplify the results of a long trade and short trade. However, margin trading involves the use of borrowed funds to long or short trade and hence, should be used with caution and only at secure and trusted bitcoin exchanges and cryptocurrency exchanges. WazirX, the most trusted and secure cryptocurrency exchange in India, lets you long trade or short trade using margin trading via its intuitive user interface and dashboards. So, whether you decide to go long or go short, we at WazirX understand exactly what you need!