How to Profit When Prices Go Up or Down
Short and long trades are classic financial strategies for profit invented by traders on the New York Stock Exchange. Long involves making a profit due to the asset’s price increase. This strategy is called the upside game, and brokers who use it are called bulls. Short is defined as a bearish position, and its followers are called bears. They profit from betting that an asset’s price will go down.
Long trades are simple, e.g., a trader buys an asset for $10 and sells it for $100. The difference is the profit. Short is more complicated. The trader borrows (not buys) stock from a broker and immediately sells it for $100, after which the stock price goes down to $10. Then, the trader is obligated to repurchase the stock and return it to the broker, making the same profit as our first example due to the difference in the stock price. In the context of the crypto market, the situation is similar, but traders open leveraged trading positions in most cases.
Short and Long in Crypto Trading
Leverage (financial leverage) allows any trader to make transactions for an amount greater than the trader’s own capital. Basically, you are borrowing the extra capital from the broker. Leverage is inherently speculative but is widely used in crypto trading to allow for greater profits even when your capital is limited. For examples of long and short trades in crypto, let’s look at two hypothetical situations:
- Long. Bitcoin (BTC) is trading at $100,000. A trader expects the price to rise by $10,000 in the next 24 hours. They open a long position with x100 leverage to buy 1 BTC. The trader’s equity for such a position must be at least 1/100 of $100,000, i.e., $1,000. During the specified period, the price reaches the declared value, and the position is closed with a profit of $10,000 ((110,000 – 100,000) x 1).
- Short. Ethereum (ETH) is trading at $4,000. The trader expects the price to drop to $3,600 over the next 24 hours. They open a short position with x50 leverage to buy 25 ETH. The trader’s equity for such a position must be at least 1/50 of $100,000, i.e., $2,000. Within the specified time, the price reaches the declared value, and the position is closed with a profit of $10,000 ((4,000 – 3,600) x 25).
So we can see how long or short selling, depending on the specific asset, the ongoing market trend, and the trader’s ability to analyze the situation can be an extremely profitable financial strategy that can be used along with leverage to maximize profit and minimize the risk by hedging positions.
