Every trade is a bet on direction, and there are only two.
Going long
A long position profits when price rises. You buy first and sell later, and your profit is the difference.
Buy an index at 5000, sell at 5050, and you have gained 50 points multiplied by your position size.
This matches how people already think about buying anything, so it rarely needs explaining.
Going short
A short position profits when price falls. You sell first and buy back later, and your profit is the difference.
Sell an index at 5000, buy it back at 4950, and you have gained 50 points.
Selling something you never bought sounds impossible, and with derivatives it is straightforward. You are not selling an object you hold. You are entering a contract to settle the difference between the opening price and the closing price, and you have taken the side that gains when price goes down.
In traditional share trading, short selling involves borrowing shares from someone, selling them, and promising to return them later. CFDs and futures involve no borrowing. You open the position in the other direction and the platform treats it the same as a long.
The asymmetry
A long position has a floor. Price cannot go below zero, so the most a long can lose is the full value of the position.
A short position has no theoretical ceiling, since price can rise indefinitely. In practice, with stop losses and the position sizes a retail trader uses, this is rarely the deciding factor. It does explain why markets sometimes move violently upward when many short positions are forced to close at once.
What direction does not determine
Being long or short carries no risk by itself. Risk comes from your position size and your stop distance, covered in Topic 6 and Topic 7. A small long and a small short carry the same exposure.
Markets also do not fall more slowly than they rise. Declines in equity indices tend to be faster and sharper than advances, which is one reason experienced traders are comfortable on the short side.
Key terms
- Long: a position that profits when price rises
- Short: a position that profits when price falls
- Open: to enter a position
- Close: to exit a position, in either direction
- Flat: holding no position at all