Long and short positions: what are they and how to trade them on the spot market

What are long and short positions? These are two fundamental approaches to margin trading that allow traders to profit both from rising and falling asset prices. Understanding the differences between these strategies is critically important for successful leverage trading in the spot market.

Understanding Basic Concepts: Long vs. Short

A long position is a strategy where the trader expects the price to rise in the future. If the price moves upward, the investor can buy the asset at a lower price and sell it at a higher price, earning the difference between purchase and sale. Margin trading systems allow borrowing additional funds (in this case, USDT) to increase the position size, then repay the borrowed amount with interest after realizing a profit.

A short position is the opposite approach. The trader opens a short position if they anticipate the asset’s price will fall. If the price indeed decreases, they can profit by selling the asset at a high price and buying it back at a lower price. In this case, the system borrows a certain amount of coins (for example, BTC), which must then be returned with interest.

The key difference lies in the expected direction: long is oriented toward growth, short toward decline. Both approaches use leverage to increase potential profits.

Practical Example: Opening a Long Position

Let’s consider a situation where a trader (let’s call him Alexey) is confident that Bitcoin’s price will rise. Here are his trading parameters:

Initial Conditions:

• Trading pair: BTC/USDT
• Current BTC price: 50,000 USDT (for example)
• Desired leverage: 5x
• Own balance: 10,000 USDT

Alexey decides to open a long position on 1 BTC. With 5x leverage, his own capital of 10,000 USDT is sufficient. When placing the order, the system automatically borrows 40,000 USDT to complete the purchase of 1 BTC at the full price of 50,000 USDT.

Scenario Development:

Two days later, Bitcoin’s price rises to 52,000 USDT. Alexey decides to close the position: he sells 1 BTC for 52,000 USDT and repays the borrowed 40,000 USDT with interest.

Profit Calculation: Gross profit = (52,000 − 50,000) × 1 = 2,000 USDT

This example shows how a long position allows earning profit when the price rises, with leverage amplifying the potential gains.

Practical Example: Opening a Short Position

Now, consider the opposite scenario. Trader Boris expects Bitcoin’s price to fall and decides to open a short position. His parameters:

Initial Conditions:

• Trading pair: BTC/USDT
• Current BTC price: 50,000 USDT
• Desired leverage: 5x
• Own balance: 10,000 USDT

Boris plans to sell 0.8 BTC. With 5x leverage, his capital allows this. When placing the order, the system borrows 0.8 BTC and opens a short position at 50,000 USDT. Boris’s spot account now shows 40,000 USDT (0.8 × 50,000).

Scenario Development:

Two days later, Bitcoin’s price drops to 48,000 USDT, as Boris anticipated. He buys back 0.8 BTC at the lower price (0.8 × 48,000 = 38,400 USDT) and repays the loan.

Profit Calculation: Gross profit = 50,000 − 38,400 − 10,000 = 1,600 USDT

In this example, the short position allowed profiting from the price decline. The borrowed coins are returned to the platform, and the difference between the sale and purchase prices is the profit.

Key Factors for Successful Leverage Trading

When using long and short strategies, it’s important to remember several critical points. The above examples do not account for trading fees and interest rates on loans, which reduce the final profit. The longer the position remains open, the more interest accrues.

Leverage is a two-sided tool. It increases both potential profit and potential loss. An incorrect market direction forecast can lead to losses exceeding the initial capital.

Margin trading requires active position monitoring and a clear understanding of long and short mechanics. Successful traders use risk management tools such as stop-loss orders to limit potential losses.

As seen from the examples, long positions aim for profit when the price rises, while short positions enable earning from a decline. The choice between them depends on your market analysis and forecast of the asset’s price movement.