Long Trades
When a day trader is in a long trade, they have purchased an asset and are waiting to sell when the price goes up. Day traders often use the terms “buy” and “long” interchangeably.
Similarly, some trading software has a trade entry button marked “buy,” while others have buttons marked “long.” The term often describes an open position. “l am long Apple” indicates you own shares of Apple Inc. and want to sell them at a higher price.
You might hear a trader say they are “going long” or “go long” to indicate interest in buying a particular asset. If you go long on (buy) 1,000 shares of XYZ stock at $10, the transaction costs you $10,000. If you can sell them at $10.20 per share, you receive $10,200. You get a nice profit of $200 before commissions. This is what you’re hoping for by going long.
Important:- When you go long, your profit potential is unlimited. This means that the price of the asset could rise indefinitely.
If you buy 100 shares of stock at $1, that stock’s price could jump to $2, $5, $50, or $100; however, day traders typically trade on much smaller price moves. You’ll be more likely to see long positions measured in cents rather than dollars.
The flip side to an increase in price is a decrease. If you sell your shares at $9.90, you receive $9,900 back on your $10,000 trade. You’d lose $100 and have to pay commission fees on top of it.
The largest loss possible you could experience in this example is if the share price dropped to $0, resulting in a $10 loss per share. Day traders work to keep risk and profits under tight control using options called a stop loss, a long call, and a long put. These options let you profit from multiple small moves and avoid large price drops.
You buy a long call to have the right to buy a stock (make another trader sell it to you) at a specific price; you buy a long put to have the right to sell the stock (make another trader buy it from you) at a specific price. The stop loss is an order placed to keep from losing too much on a trade if the price moves against you.
Short Trades
Shorting a stock is confusing to most new traders. In the real world, you have to own something to sell it. You can enter short trades (sell assets before buying them) in the hopes that the price will go down so that you can sell it to another trader.
You’ll hear traders use the terms “sell” and “short” to refer to the same action. Some trading software has a trade entry button marked “sell,” while others have one labeled “short.” You use the term short to describe an open position, as in, “I am short SPY,” indicating that you have borrowed (usually from your broker) S&P 500 (SPY) ETF and are ready to sell.
Important:- When you short a stock, your profit potential is limited to the amount you paid, but the risk becomes unlimited because the price could rise indefinitely.
Similar to the example of going long, if you go short on 1,000 shares of XYZ stock at $10, you receive $10,000 into your account, but this isn’t your money yet. Your account will show that you have negative 1,000 shares, which will need to be replaced. Note that you’re “short” 1,000 shares, not $10,000.
If you repurchase the shares at $9.60 per share, you will pay $9,600 for the 1,000 shares. You received $10,000 when you sold them (went short), so you make $400 before commission fees. If the stock price rises and you rebuy the shares at $10.20, you will pay $10,200 for those 1,000 shares. Here, you’ve lost $200 and still need to pay broker fees.
You can buy options to help you mitigate losses when you’re short. The stop loss is the same, but these options are used when you’re short—a stop loss, a short call, and a short put.
You buy a short call to have the right to sell a stock (make another trader buy it) at a specific price; you buy a short put to have the right to repurchase a stock (make another trader sell it to you) at a specific price. The stop loss prevents you from losing too much on a trade if the price moves against you.
Shorting, or selling short, allows you to profit if the market is moving up or down. You can sell and buy throughout the day on price movements, which is why many traders only care that the prices are moving, not which direction they are moving.
When Do I Use a Long or Short Trade?
You would go long or use a long trade on a stock that you believe or know will rise in price. A long trade to a day trader is at most one trading day. If you find an opportunity to enter a trade, and you know the stock price will increase (and be desirable for another trader after you buy it), you’d go long on that stock.
You would go short on a trade if you know the price was going to decline. Your broker must borrow the shares from the owner (probably another broker) or lend them to you if they own them. If the broker can’t borrow the shares for you, you’re not going to be able to short the stock. Stocks that just started trading on the exchange—called Initial Public Offering stocks (IPOs)—are not shortable (able to be sold and then bought).
Traders can go short in most financial markets. A trader can always go short in the futures and forex markets (different from the stock market). Most stocks are shortable in the stock market as well, but not all of them.
Note:- Whether you go long or short depends on the amount of risk you can take on and your trading strategy and preferences.
There might be times when you’re long on one stock and short on another. You might even find an occasion to short a stock, then go long on it. Some traders can keep shorting the same stock throughout a trading day.
