What is short and long and how to use them in cryptocurrency trade?

In medieval Europe, 4 sticks or counting sticks made of hazel were used to account for debts. On one of the faces of the tags with transverse notches, the amount launched into circulation was indicated, after which they split the tag along the notches, but not completely, but with a cut in the “handle” area. The result was a long part with a handle (stock) and a short part (Foil), complementing this long part to a full stick. The notches were on both parts. According to the coincidence of these parts, control was carried out. It was believed that due to the texture of the hazel, the fake was impossible. Two parts kept two parties participating in the transaction. From this practice, the terms “Stock Market” (Long ”(LONG) and“ Short ”(Short” (Short) were allegedly.

The expressions of “short” and “long” positions have become widespread on American stock and commodity-raw exchanges in the 1850s. Perhaps the earliest mention of short and long positions is present in the magazine The Merchant’s Magazine, and Commercial Review, Volume. XXVI, in January-June 1852.

Despite the names, the period for a short position can be quite long (week, month), and the period for Long is short enough. From the world of traditional finances, the terms of Short and Long migrated to Bitcoin Industry.

Who are the “bulls” and “bears”

Exchange players are usually called bulls or bears, depending on what strategy they follow. Playing for an increase (that is, those who open the Longs) are called “bulls”, and players who place short positions, that is, putting on lowering the market – “bears”.

These terms are conditional: there are no pure bulls and bears on the cryptornka, often the same trader simultaneously trades both in shorts and long, although the volume of positions may differ.

What is Long

Long (long position) – buying an asset in anticipation of the fact that it will grow in price. The amount of profit depends on the increase in the value of the asset. A long position is the most popular type of transaction in retail investors and are used in the spot market.

What is short

Short in simple words – selling a financial instrument in anticipation that it will become cheaper.

However, a short position mechanics are somewhat more complicated than Long. Within the framework of this scheme, the trader takes the asset and sells it in the open market at the current price. Then he waits for a fall in the course, buys the amount of asset that he borrowed at a lower rate and gives a debt with interest. The profiter leaves profit received due to changes in prices. Otherwise, if the price of the asset rises, the investor will receive a loss.

Example

In December 2017, the trader purchased bitcoins for $ 19,000 per coin. He sold these coins at the same period of $ 19,000, and then paid the lender about $ 6000 for each BTC, when the price decreased significantly in February 2018. From each coin he received a profit of $ 13,000.

What does marginal trade have to do with it

If cryptocurrencies in the spot market can, in fact, trade only long positions (although there are techniques that are similar to shorting), then in margin trade it is possible to openly open short.

Within the framework of margin trading, which provides the opportunity to make transactions with the shoulder, the user must provide a deposit – to pay an amount (margin) to the deposit, which guarantees payment of debt https://gagarin.news/news/does-mining-negatively-impact-the-environment/ obligations under the established exchange with the rules.

The concept of margin is closely related to the concept of leverage or credit shoulder (leverage) – a multiplier that increases the user deposit available for the transaction due to borrowed funds. In the cryptocurrency market, this coefficient can range from 2: 1 to 100: 1 or more. That is, trading with a 50x shoulder means that when making cash in a deposit in the amount of $ 100, you can open a position for up to $ 5000.

If the market value of cryptocurrencies moves in the direction expected by the trader, the income increases in proportion to the chosen credit shoulder. At the time of the closure of this position, the pledge body is returned to the creditor together with commission fees, and the balance of the profit is credited to the user account.

If the price moves in the opposite direction, then as soon as the cost of assets (both his own and borrowed), the trader reaches the amount of the loan with interest (the amount that the trader must return to the creditor), the exchange automatically eliminates all positions of the player and returns his funds to the lender. In the amount returned to the creditor, the margin is fully included.

In the classical trade with the shoulder in the stock market for the elimination of the position, the so-called Marzhin-Call is preceded-the requirement of additional support. Often the marin-collo is directly called the moment of liquidation, on the slapt-traders slang-“catch the walrus”.

The trader can complete the unsuccessful deal independently, without waiting for the liquidation. Moreover, he loses not the whole position, but only part of the margin. You can manually eliminate the position independently through Stop Loss (Stop Loss)-an order to limit trade risks, which involves automatically closing the transaction when a certain price mark is reached.

What is hedging?

The cryptocurrency market uses a mechanism known as hedging – “insurance” in case the trend of the asset price does not correspond to the position of the trader. For example, you have a long position, and the price of cryptocurrency is reduced.

Hedging is based on the opening of shorts that balance the long positions and allow you to stay “in zero” with an undesirable change in the market situation. The investor leaves the original long-position of untouched and opens the shorts, or uses additional opportunities.

Headfield- a solution for a medium and long-term strategy. This mechanism is somewhat contrary to intraday trading, where market speculations prevail. The popular way of hedging positions involves the use of futures contracts: unlimited and urgent.

Unlimited contracts operate on the following principle: the so -called financing rate is established every eight hours. The last participants in transactions pay to each other instead of translating the contracts themselves or their full cost. Depending on the market situation, either the holders of long-control holders of shorts pay, or vice versa, or vice versa.

Contact contracts are performed automatically if the investor himself does not close them until the day of expiration. You can have hedged not only futures, but also with options – derivatives of financial instruments for more advanced market participants.

What is averaging?

Within the framework of this strategy, the investor buys an asset at a lower price, thereby lowering the average purchase price.

Example

Bitcoin’s price reached $ 2900, then began to decline. Seeing the correction phase, the trader began to buy coins at consistent levels of lowering: $ 2800, $ 2600, $ 2400, $ 2200, $ 2000. The average purchase price was $ 2400. After the correction phase, the rate began to grow and subsequently returned to the level of $ 2900 dollars.

The pros and cons of the Longs and shorts

Opening long positions is a more understandable strategy that boils down to a simple principle of “buy cheaper, sell more expensive”.

Shorting can be an effective investment strategy, but much more risky than investments for a long time or averaging. Opening short positions for large amounts is only experienced traders who can comprehensively analyze market dynamics.