Long and Short: Old and New Trading Strategies for Both Bull and Bear Markets

In the world of trading and investing, two essential terms to understand are “long” and “short,” which are basic strategies that help traders profit whether the market is rising or falling. Today, we’ll guide you through these concepts in depth so you can choose the right strategy and increase your chances of making profits from market volatility.

What is a Long Position: Buy now to sell when prices surge

Long order or opening a Long Position means that a trader places a buy order for an asset, expecting its price to increase in the future. The trader holds the asset until the price rises enough, then sells to realize a profit from the price difference.

This Long strategy works well in a bullish market because you buy low and sell high, following the fundamental principle of “buy cheap, sell expensive” that has been used since ancient times.

For example: Suppose you believe a company’s stock will perform better. You decide to buy 100 shares at 41 baht per share. This is opening a Long Position. When positive news causes the stock price to rise to 42 baht, you sell your shares. The result is a profit of 1 baht per share.

However, if the market doesn’t move as expected and the stock price drops to 40 baht, you will need to close your Long position by selling the shares. In this case, you incur a loss of 1 baht per share because you bought high (41 baht) but sold low (40 baht).

What is a Short Position: Sell first to buy back when prices fall

Short order or opening a Short Position is a strategy that is completely different from Long. In a Short, the trader sells an asset first, expecting its price to decline. Then, they buy back the asset at a lower price to close the position and realize a profit from the price difference.

This Short strategy is effective in a bearish market because you sell high and buy back low, reversing the “sell high, buy low” principle. Traders can profit not only from rising markets but also from falling markets.

For example: Suppose you hear rumors that a company will face supply issues. You think its stock price will drop. You borrow 100 shares of the stock from a broker and sell them at 350 baht each, receiving 35,000 baht. This opens a Short Position. When news confirms the supply problem and the stock drops to 300 baht, you buy back 100 shares at this lower price, costing 30,000 baht, and return them to the broker. Your profit is 5,000 baht.

Conversely, if the stock price rises instead to 420 baht, you will need to buy back at this higher price, resulting in a loss of 5,000 baht.

Real-world examples: How Long and Short work in the stock market

Long Strategy: Buy low, sell high

Tim receives good news that PEAR, a leading manufacturer, has performed much better this year. He analyzes that the market will be more interested in this stock and its price will likely rise. Tim decides to buy 100 PEAR shares at $350 each, spending a total of $35,000 (100 shares × $350).

This is Tim’s Long Position. He believes the price will surge.

After some time, investors learn about PEAR’s strong earnings and start buying heavily. The stock price rises to $400 per share. Tim sees a good opportunity and sells all 100 shares at this price, receiving $40,000.

Result: Tim bought for $35,000 and sold for $40,000, making a net profit of $5,000. This is a successful Long strategy.

Short Strategy: Sell high, buy low

Tim hears a rumor that a major supply country for ORANGE, a competing manufacturer, has announced a halt in exports. This situation is expected to cause ORANGE’s stock to fall due to supply shortages.

Tim decides to short sell, even though he doesn’t own any ORANGE shares. He borrows 100 shares from a broker and sells them immediately at $350 each, receiving $35,000.

This opens a Short Position. He believes the stock will decline.

Later, the halt in exports becomes official news, and the market reacts strongly. ORANGE’s stock drops to $300. Tim buys back 100 shares at this lower price, costing $30,000, and returns them to the broker.

Result: He sold for $35,000 and bought back for $30,000, netting a profit of $5,000. This is a successful short strategy.

Limitations and risks: Not all instruments are suitable

Long and short orders are not available for all types of instruments. They are typically used with derivatives, CFDs, TFEX, and other tools designed for traders to profit from price movements.

However, if you want to short sell common stocks traded on the main market, you usually need to go through the borrowing process, which involves legal restrictions and can be complicated.

Nowadays, tools like CFDs make short trading much easier with quick procedures via digital platforms, without the need to borrow actual stocks. Traders can then trade both long and short positions flexibly, use leverage to invest less capital, and aim for higher profits.

But, higher potential gains come with increased risks. Both short selling and leverage can amplify losses rapidly. Traders should thoroughly understand these risks, set appropriate stop-loss orders, and implement proper risk management.

Understanding long and short is fundamental for trading. You can use both strategies to profit in any market condition—bullish or bearish. The key is to understand the roles, limitations, and risks of each strategy beforehand.