In this article, we will explain what long and short positions in crypto are. We will also briefly cover the features that set them apart and where you can open such positions.
What Are Long and Short Positions in Crypto?
In the trading of assets, investors can take two types of positions: long and short. These positions reflect the two possible directions of an asset’s price required to generate a profit.
When it comes to crypto trading, the term long position refers to the buy orders a trader places when they want to benefit from the ascending price of a cryptocurrency. When a trader “goes” long, they expect the price to increase from a given point and buy the cryptocurrency.
In opposition, when a trader “goes short,” they expect the price to decline from the entry point and, therefore, sell the cryptos.
Cryptocurrencies act similarly to company shares since they are typically traded against fiat currencies, such as the U.S. dollar, and they consistently seek to go higher.
Where Can You Open Long or Short Positions?
In order to create reliable hedging strategies and minimize potential losses, traders can mix short and long positions. Investors can take such positions on any cryptocurrency exchange that provides spot or derivatives trading services. Binance and Coinbase are two such examples.
While spot exchanges allow investors to buy and sell cryptos, derivatives exchanges allow them to go long or short on a given cryptocurrency without actually buying or selling it.
Long positions generally exceed short ones in a bullish market, as more investors want to take advantage of the increasing prices. On the flip side, in a bearish market, short positions usually exceed long ones.
Professional traders typically go long when the price retreats from recent highs and short when the price tests resistance levels.
What to Consider Before Going Long or Short
The decision to open a long or short position should always be backed by both technical and fundamental analysis. Investors should consider all the factors that impact the market before going long or short.
Besides considering indicators and chart patterns, an investor should also take a closer look at the profile, features, and value of a certain crypto project before investing in its token. Otherwise, they could go against the market.
For example, day traders can go long during the price rally of a given cryptocurrency or wait until its price breaks above a strong resistance.
On the other hand, investors can go short when the price of an asset cannot break a resistance level and starts departing from it. They can also do so when the market has increased for a long time and has reached an overbought level.
Still, given that the crypto market is still in its early stages, cryptocurrencies can experience sharp fluctuations that are not backed by fundamentals and patterns. That’s why even such analysis comes with risks.
Long and short positions stand at the center of investing and trading. Understanding the forming trends is crucial when it comes to making the right decisions. Still, as is the case with any investment, going long or short is not free of risks, so make sure you only invest what you can afford to lose.