Understanding the Basics of Long and Short Positions in Crypto Trading

In the ever-changing world of cryptocurrency trading, a trader can go from a hero to zero and vice versa in the blink of an eye. You need to know not only how to ride the waves but also by learning when to surf against them. As such, any trader worth their salt must know the art of long and short positions in crypto trading. 

These two foundational concepts don’t just determine how traders make decisions; they also define how profits are generated, risks are managed, and trends are anticipated in a market that never sleeps.

The crypto markets are either dominated by bulls or handled by the bears. These terms are commonly used for the long and short positions in crypto trading markets, where you either purchase an asset at a lower price and aim to sell it at a higher one, or you borrow and sell at a high price and wait for the dip to return the asset by buying at a lower price.

Understanding Positions in Crypto Trading

Position in trading refers to the market exposure of a trader and their investments in a particular asset or security. It explains how much a trader has invested and what their stance is on long or short positions. While there are four positions in the trading market, crypto trading deals with two: long and short.

While it is up to a trader to decide the position they are willing to work with, market conditions influence that decision. If the trader believes a cryptocurrency will increase in the coming days or months, they will likely opt for the long position, as it allows them to hold the assets and sell them for a profit.

However, if a cryptocurrency is on a downward trend, sticking with the short position is the best thing to do. It involves borrowing a cryptocurrency at a high rate, selling it, buying the currency again at a much lower price, and then giving it back, thus netting the difference after the legal fees.

What Is a Long Position in Crypto Trading?

A long position means you are buying a cryptocurrency with the expectation that its value will increase over time. This means that you will buy the cryptocurrency at a low price with the aim of selling it at a high price in the long run to earn massive profits.

The long position in trading is suitable for bullish markets and when the market is positive for a cryptocurrency. You must look at the previous trends before making an educated guess.

During the long position, you can either use spot trading or margin trading. Spot trading involves purchasing and selling stocks on the spot while retaining full ownership. This is ideal for newcomers as it doesn’t involve any risks.

However, margin trading is more complex and is suitable for experienced people or firms. This involves borrowing assets and then selling them. It can result in significant losses, and you won’t own the asset until the loan has been repaid.

What Is a Short Position in Crypto Trading?

A short position involves believing that the price of a cryptocurrency will fall. You borrow the asset from a trader or exchange, sell it at the current price, then repurchase it at a lower price to return it. This will allow you to pocket the difference after paying the fees.

The main purpose of a short position is to make a profit from a falling cryptocurrency. This is ideal for bearish markets where you must follow the trends and read the currencies that are prone to a massive fall.

If the market continues to go up, this can result in a massive loss. As a currency that is short by traders, rises, the traders resort to panic buying, further increasing the value of the currency. This is not a welcome sight for the newcomers.

Differences Between Long and Short Positions

Long and short positions are two different approaches to trading Cryptocurrency. The main differences between the two approaches are. 

Feature	Long Position	Short Position
Expectations	Price will increase	Price will decrease
Actions	Buy at a low price	Borrow and sell at a high price
Goal	Sell at a high price later	Buy back at a lower price and return the asset
Risk Level	Limited to your initial investment	Unlimited, depending on how high a cryptocurrency can go
Ownership	You own the asset	The lender owns the asset
Markets Involved	Bull Markets, long-term investment	Bear Markets, short-term investment

How to Long Crypto

Below is a step-by-step guide on how to long crypto by evaluating your exchange and leverage choices, while minimizing the risks involved.

1. Your first option should be to look for a reliable exchange. This includes platforms with strong security, liquidity, and user-friendly interfaces.
2. The next step involves creating and verifying your account(s). To do so, sign up and complete the verification process.
3. Fund your account with any currency or cryptocurrency of your choice. 
4. The next step involves choosing the market of your choice, whether you are deciding to go with spot trading or margin trading.
5. If you are using margin, go for normal leverage like 2x or 3x, as the potential for loss increases with higher leverage.
6. Analyze the Market. Use technical analysis (charts, indicators) and fundamental analysis (news, project updates). Make sure to identify entry points, trends, and support/resistance levels.
7. Place your long trade by entering a buy order at market price or setting a limit order at your desired entry. Make sure to confirm the amount and leverage you want to choose for the cryptocurrency.
8. You can exit automatically by using a stop-loss order if the price falls too far for you to recover. You can also set take-profit levels to lock in your gains. 
9. Monitor your position by tracking price movements and news.
10. Don’t be greedy and close the position as soon as your target is hit. Either withdraw or reinvest your assets depending on your next move.

How to Short Crypto

Below is a detailed step-by-step process required to short crypto successfully. While the fundamentals remain the same as how you can long crypto, there are some basic differences.

1. The first step is to choose a trading platform of your choice, depending on its ability to short crypto via margin.
2. In the next step, create and fund your account by completing the verification process and depositing funds into your account.
3. Navigate to the margin section, as shorting doesn’t support Spot trading.
4. In the next step, select the asset to short. Choose a cryptocurrency you believe will drop in price (e.g., BTC, ETH). Make sure to analyze charts and news to support your decision.
5. Make sure to set leverage at 5x or lower, as it involves a greater risk of losing.
6. Place a short order instead of buying. Select the market type, and confit the trade amount.
7. Add a stop-loss to limit potential losses and add a take-profit to automatically lock in gains.
8. Make sure to watch price movements and adjust stop-loss/take-profit as needed. Be ready for volatility and sudden reversals.
9. When the price drops to your target, buy back the asset. This will cover your borrowed crypto and secure your profit.

Risks Involved With Long and Short Positions

While trading looks extremely lucrative, both Long and Short positions are not risk-free. You can end up with significant losses rather than turning in a profit if not careful.

Risks for Going Long

Below is a list of risks associated with going Long in cryptocurrency trading.

1. Crypto markets are wild, and a sudden downward swing can wipe out all gains in an instant.
2. If a bull market turns bearish, it means a massive loss for those holding a long position.
3. If the value of cryptocurrency goes down, traders dealing with margin or using leverage suffer massive losses.
4. Government bans or actions can drastically affect the price of a cryptocurrency.
5. Greed plays a major role here as it can lead to significant loses if you try to hold for too long or panic sell.
6. Misreading the indicators can lead to a bad entry or a bad exit.

Risks for Going Short

Below is a list of risks involved with going short in crypto trading.

1. There is a potential for infinite losses if the prices continue to go up and never fall.
2. Shortening often involves leveraging. However, if the market moves against you, it means massive losses.
3. If too many traders short, it will result in force buying, which will further increase the price of cryptocurrency.
4. You may need to pay legal fees or royalties on borrowed assets.
5. Volatile cryptomarkets swing rapidly, which can change a winning trade into a losing one.

When Should You Long or Short Crypto?

Knowing the difference between going long and short determines whether you will survive or be killed in crypto trading. As a trader, you will need to look out for the following things to make this important decision.

1. Market Outlook: You should check whether the market is bullish or bearish. If it is the former, it is the right time to go Long. For the latter, go Short with your crypto trading.
2. Analysis Focus: Your focus should be on signals, whether they are breakout or breakdown. Long position favors the breakout signals and increases support levels. In comparison, short positions are often accompanied by resistance.
3. Sentiment: In long-position markets, the sentiment is usually positive with strong investors’ confidence. However, Short markets are fear and uncertain for the traders.

Traders must look for the following tools to make an informed and calculated decision to decide whether to go with a long or short position in crypto trading.

Technical Analysis

For technical analysis, use the following approaches.

1. An Upward Trend represents a long position, while a downward trend represents a short position.
2. Prices above 50/200 moving average (MA) represent a bullish market (Long). Anything below it is bearish (short).
3. Look at the indicators to make an informed decision. If RSI is below 30, it is a Long position. Anything above 70 is a Short Position.
4. Chart patterns are extremely important. If it is a golden cross, then it is a long position. A death cross represents a short position.

Fundamental Analysis

If you see partnerships with cryptocurrencies, upgrades, and new forks, then it means it is a bullish market. However, crackdowns by the government or banks represent a bearish market.

Sentiment Analysis

If you notice a positive chatter on social media, it means a bullish run is on the way. However, a sense of uncertainty and fear often accompanies a bearish run.

While you can use the above indicators to predict the position of the crypto market, we have a few tips for newcomers to survive the early onslaught.

1. Always combine technical analysis with sentimental analysis to get the complete picture. Never rely on one analysis, as it can turn the tide and force you to make an uninformed decision.
2. If you see the price of a cryptocurrency rising, but RSI falls, this means a potential reversal.
3. High volumes of breakout or breakdown signal conviction.
4. Always follow major new channels and follow the headlines regarding the shift in market position.

Long and Short Tips for Beginners

Below are some tips for beginners who are looking to start crypto trading. These tips will allow you to make informed decisions and minimize your losses, whether you go with the long or short position.

1. Always start with a small capital and invest only 2% of your capital in a single trade unless you are highly experienced in crypto trading.
2. Make sure to set up step-loss orders in your trading apps. This will allow you to automatically exit a trade without incurring losses.
3. Don’t be greedy. Set take-profit targets in trading apps. This will allow you to take out a set profit without waiting for further increase or decrease.
4. Always stick with high-volume coins like BTC and ETH.
5. Plan your entries and exits. Don’t trade or make orders on impulse.
6. Make a journal to record your entry, exit, profit, losses, and reasoning behind the whole trade.
7. If you are too late to join a trend, wait out, as the late buyers mostly lose out.
8. Use demo accounts before investing with your real money.
9. Monitor social media and news channels to see how the trade market is trending.

Learning Crypto Trading and Investment Made Simple With Dypto Crypto

Positioning in the trade market, especially in crypto, is extremely scary and can be tiring for newcomers. You need to be constantly on the lookout to see how the markets are trending. Unlike other markets, crypto works 24/7, making it impossible to learn everything from experience.

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Frequently Asked Questions (FAQs)

Q: Can I long or short crypto without leverage?

A: Yes, you can long or short crypto without leverage. However, short positions heavily rely on leverage to make a profit.

Q: Is shorting crypto risky for beginners?

A: Yes, shorting crypto is more for advanced users. Short Position often generates fear and uncertainty, and the chances of losing are infinite if you are using leverage.

Q: Which exchanges allow long and short positions?

A: Most exchanges, including Binance, Bybit, Kraken, Kucoin, OKX, Bitfinex, and Deribit, allow both Long and Short positions.

Q: What analysis helps decide between long and short?

A: Technical, Fundamental, and Sentiment Analysis help decide between Long and Short Crypto positions.

Q: Can I make money shorting crypto in a bull market?

A: Technically? Yes. Realistically? No. It is almost impossible to go Short in a Bull Market without losing big.