Introduction To Order Types: Long And Short Trades

[sirty143]

Before learning about specific order types, it’s helpful to review long and short trades. Trades can be entered in two different directions, depending on where you expect the market to go. Long trades are the classic method of buying with the intention of profiting from a rising market. All brokers support long trades and you won’t need a margin account – assuming you have the funds to cover the trade. Even though losses could be substantial, they are considered limited because price can only go as low as $0 if the trade moves in the wrong direction.

Short trades, on the other hand, are entered with the intention of profiting from a falling market. Once price reaches your target level, you buy back the shares (or buy to cover) to replace what you originally borrowed from your broker. Since you borrow shares/contracts from a broker to sell short, you have to have a margin account to complete the transaction. Not all trading instruments can be sold short, and not all brokers offer the same instruments for short sale. (For related reading, see Margin Trading.)

Long Trade= Profit from a rising market

Short Trade= Profit from a falling market

Trading short positions is an important part of active trading because it allows you to take advantage of both rising and falling markets – but they require extra caution. Unlike long trades, where losses are limited, short trades have the potential for unlimited losses. This is because a short trade loses value as the market rises, and since price can theoretically continue rising indefinitely, losses can be unlimited – and catastrophic. You can manage this risk by trading with a protective stop-loss order.


Source:  INVESTOPEDIA