Try (Long) and Short (Short) - two strategies to profit in the derivatives market

Understanding Long and Short Trading Positions

In the world of derivatives trading, Long and Short orders are not just words but fundamental tools that allow traders to profit from both rising and falling markets. Unlike traditional investing, which requires waiting for prices to increase only.

Long Position involves opening a position by buying an asset, with the trader expecting the price to rise. The position is closed with a sell order to capture the increasing price difference. This position is suitable for an upward trend, based on the principle of buying low and selling high.

Short Position is the opposite, involving opening a position by selling first, with the trader expecting the price to decline. The position is then closed by buying back to profit from the price adjustment. This position is suitable for a downward trend, based on the principle of selling high and buying low.

Practical Example: Profit from a Long Position

Suppose Mr. Somchai follows news updates and sees that TECH company has increased its earnings compared to last year. He decides to open a Long position by buying 150 shares at 250 THB each, totaling 37,500 THB.

After many investors realize this good news, TECH’s stock price rises to 280 THB. Somchai closes his position by selling 150 shares at this price, receiving a total of 42,000 THB. The profit is 4,500 THB, earned from buying low and selling high.

However, if the market moves against expectations, such as the stock price dropping to 220 THB, Somchai decides to close his position to minimize losses. The result is a loss of 4,500 THB.

Practical Example: Profit from a Short Position

Suppose Suree receives information that FARM company will face supply chain issues. He expects the stock price to decline and borrows 100 shares of FARM from a broker, immediately selling them at 320 THB, receiving 32,000 THB in cash.

A week later, rumors turn out to be true, and FARM’s stock drops to 270 THB. Suree takes the opportunity to buy back 100 shares at this price, costing 27,000 THB. He returns the shares to the broker and closes the Short position. The difference of 5,000 THB is profit from selling high and buying back low.

Conversely, if Suree’s prediction is wrong and the stock price rises to 350 THB, he must close the position by buying back at this price, resulting in a loss of 3,000 THB.

Differences and Importance of Long and Short

Long Position should be used during an uptrend because the expectation is that the price will increase. Investors use less capital to buy assets.

Short Position should be used during a downtrend because the expectation is that the price will decrease. It involves borrowing assets to sell first and buy back at a lower price.

The main difference is that Long is a bet on rising prices, while Short is a bet on falling prices. Both positions offer opportunities to profit from market volatility but require good risk management.

Cautions

Trading derivatives such as CFDs carries high risk because leverage can amplify gains but also losses. Traders should have a thorough understanding of Long and Short strategies before using real capital.