Introduction To Order Types: Long And Short Trades
AAA
  1. Introduction To Order Types: Introduction
  2. Introduction To Order Types: Long And Short Trades
  3. Introduction To Order Types: Market Orders
  4. Introduction To Order Types: Limit Orders
  5. Introduction To Order Types: Stop Orders
  6. Introduction To Order Types: Conditional Orders
  7. Introduction To Order Types: Duration

Introduction To Order Types: Long And Short Trades

A basic concept that must be understood before learning about specific order types is the direction in which a trade can be established. Trades can be entered in two different directions, depending on the anticipation of a rising or falling market. Long trades are the classic method of buying with the intention of profiting from a rising market. Long trades can be conducted through all brokers and do not necessarily require the trader to have a margin account (assuming the account has funds to cover the transaction). The losses from a long trade are considered limited (even though these losses could be extensive). This is because if a long trade is entered at any level, price can only go as low as $0 if the trade moves in the wrong direction.

Short trades, on the other hand, are entered with the intention of profiting from a falling market. This is accomplished by borrowing a stock, futures contract or other instrument from a broker and then selling them. Once price reaches the target level, traders buy back the shares (or contracts), or buy to cover, and replace what was originally borrowed from the broker. If price drops, the trade may be profitable (depending on other factors such as slippage and commission); if price rises, the trade will be a loss. Short trading requires a margin account with a broker, since the trader must borrow shares/contracts from the broker in order to complete the transaction. Not all trading instruments can be sold short, and not all brokers offer the same instruments for short sale.

Long Trade = profit from a rising market
Short Trade = profit from a falling market


Trading short positions is an important part of active trading because it allows traders to take advantage of both rising and falling markets. Unlike long trades, where losses are limited, short trades have the potential for unlimited losses. This is because a short trade loses value as the market rises, and since price could theoretically continue rising indefinitely, losses can be unlimited - and catastrophic. Trading with a protective stop-loss allows traders to manage this risk.

Introduction To Order Types: Market Orders

  1. Introduction To Order Types: Introduction
  2. Introduction To Order Types: Long And Short Trades
  3. Introduction To Order Types: Market Orders
  4. Introduction To Order Types: Limit Orders
  5. Introduction To Order Types: Stop Orders
  6. Introduction To Order Types: Conditional Orders
  7. Introduction To Order Types: Duration
RELATED TERMS
  1. Bidding Up - Securities

    The act of increasing the price an investor is willing to pay ...
  2. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  3. Mass Index

    A form of technical analysis that looks at the range between ...
  4. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  5. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
  6. Negative Volume Index - NVI

    A technical indicator that relies on changes in a security’s ...
  1. What are the main differences between Money Flow & Money Flow Index (MFI)?

    Find out how to differentiate between standard money flow and the Money Flow Index, two methods of expressing the strength ...
  2. What are the best technical indicators to complement the Parabolic Indicator?

    Learn about two of the best technical indicators recommended for traders to use to refine a trading strategy based on the ...
  3. What is the Double Exponential Moving Average (DEMA) formula and how is it calculated?

    Discover the equation for double exponential moving average, or DEMA, and learn how it is calculated for a better understanding ...
  4. How do I use Mass Index for creating a forex trading strategy?

    Discover how forex traders can use Donald Dorsey's mass index to spot possible reversals in the price action trends of currency ...

You May Also Like

Related Tutorials
  1. Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  2. Economics

    American Depositary Receipt Basics

  3. Investing Basics

    Stock Basics Tutorial

  4. The NYSE floor excitement after a rebound. Being a stock trader can be highly gratifying.
    Active Trading Fundamentals

    Introduction to Stock Trader Types

  5. Trading Strategies

    Guide to Pairs Trading

Trading Center