Which strategy is better between long vs short? They both have their benefits. Going long is easier because every broker allows you the ability to go bullish on a stock. Shorting is a great strategy to use in bear markets or during reversal setups. All you need to do is sell a position near resistance and buy low to cover. Simple process, but you need a specialized broker like SpeedTrader, Centerpoint, Interactive Brokers or LightSpeed to get you short locates.
Table of Contents
What Is the Difference Between Long vs Short?
Long means you have a position in a stock that you expect to go up in value. Short means the opposite. That you have a “short” position and expect the stock to go down in value (you profit in each direction.) Lets break it down below:
- Bulls try to push price up and that’s when traders look to enter a long (buy)
- Bears try to push price down and that’s when they go short (sell short)
- Remember that the trend is your friend when going long or short. (don’t bet against it)
- Longing is typically considered easier than shorting
- Pick stocks that have already won! (already bullish, already bearish)
There are two very different trading strategies known as long vs short. Long and short positions are the two of the main strategies used to trade the stock market.
Long vs short positions are different and you do not want to get them confused. Hence the need to know what each strategy means as well as how to trade them. Every trader should be aware of how to use the different strategies.
That doesn’t mean you have to or even should trade both strategies. You may be more comfortable with one over the other.
Long vs Short With Options
Long vs short positions are the two most basic trading choices. You can long and short stocks, options and futures. Some people choose not to short a stock but buy put options instead. This is seen as a little bit safer than shorting a stock outright (shorting is riskier than longing because when you short a stock you have unlimited risk) Since the battle of the bulls and bears chooses the direction of the stock market, you want to know how to capitalize on those moves.
Long vs short refers to the type of trade being placed. In other words, it’s based on whether you open a trade by buying or selling.
There are specific order types such as market or limit orders. It’s important to know what type of order you’re placing when going long or short.
You can place a stop loss when you place the order to protect your position. Stop losses protect profits as well as keeping losses small.
Day Trading Terms Long and Short
When a trader goes long, they’re hoping that price will move up. Day trading terms use “buy” and “going long” interchangeably.
As a new trader, you may hear going long and think of long term trading or investing. However, longing just means that you believe a price will go up and you’re in an active (positive) position.
As a result, if you hear someone say they are long on a stock, it doesn’t mean they’re holding it for years. They could be holding for seconds or minutes. Hence the differences between long vs short.
You’re getting insight into a how trader feels about a stock. That doesn’t mean you should go out and copy them however. Do your own due diligence. You may see a different play on the stock. Hence what understanding patterns and other forms of technical analysis to make your decision.
Please note, all brokers allow long trading. You don’t need margin to long as long as you have the funds to cover your trades.
What Does a Short Position Mean?
- Shorting is the bearish side of trading in long vs short. Short selling is selling shares that you don’t own to buying back when price falls. In other words, you borrow shares from your broker with the belief that price is going to fall. You cover your position to close it out and give the shares back to the broker.
Your profit is the difference between price in where you sold and where you covered. Shorting is risky business. In essence, you could lose an infinite amount of money shorting.
If a stock trades all the way down to $0 and you’re long, you lose the initial investment. It can’t go negative so you don’t lose more than that.
However, if you go short and the stock continues to move up instead of down, you can end up losing everything and then some. You’re on the hook.
Now that doesn’t happen because of risk management and stop losses. Keep your losses small. If a trade goes against you, get out of it instead of holding on hoping to recover any losses; especially when shorting.
Not every broker allows short selling. If shorting is something you’re interested in make sure your broker has the option. If not, you may need to look into another option such as Interactive Brokers.
The Options Side
Options trading is different than trading shares. Options are made up of contracts. Each contract controls 100 shares.
Options trading has the long vs short game however. Call options take the long side of things. If you believe price is going to go up, then you purchase a call.
Put options take the short (by short we mean bearish) side of things. When you believe price is going to fall, you can buy or sell put options.
Many, if not all, brokers allow options trading. So you can still technically short by trading put options. However options do have more moving parts than trading shares.
Hence you need to study and practice trading options. Although, you should be doing that with the long vs short trading as well.
Using Patterns to Determine Long and Short Plays
You don’t have to guess whether or not you should go long vs short. Being able to see patterns is so important, especially when trading penny stocks.
Candlesticks by themselves tell a story. However, when grouped together they form patterns. These patterns not only provide support and resistance but also direction.
There are bullish and bearish reversal patterns as well as continuation patterns. If you’re trading without patterns, you’re setting yourself up for disaster.
Traders pay close attention to support and resistance as well as patterns.
Long vs short plays make the money depending on what the setup being presented offers. However, trades will go against you. It’s important to remember to cut your losses quickly and take your profits. Getting greedy over profits is the best way to give them back.