Going long means buying because you expect the price to rise. Going short means selling first because you expect the price to fall, then buying back later to close. Every trade you open is one or the other, and the arithmetic is the same in both directions with the order of the prices swapped.
What you will learn
- How a long position and a short position each gain and lose
- How to work out the dollar result of a trade in either direction
- Why every forex trade is long one currency and short another
- What makes short trades riskier in practice, and how a stop loss changes that
Going long: buy first, sell later
A long position gains when the price rises and loses when it falls. You open it by buying and close it by selling. The result is the exit price minus the entry price, multiplied by your position size.
Say you buy 50 CFDs on a share at $180. A CFD, as you saw in markets and CFDs, lets you trade the price move without owning the share. The price rises to $186 and you sell. $186 minus $180 is $6, and $6 × 50 is a $300 gain. If the price had fallen to $175 instead, $175 minus $180 is minus $5, and the trade would have lost $250.
Going short: sell first, buy back later
A short position gains when the price falls and loses when it rises. You open it by selling and close it by buying back. The result is the entry price minus the exit price, multiplied by your size.
When people short a share on a stock exchange, they borrow the shares, sell them, and later buy them back to return them. A CFD has nothing to borrow. You open a sell position on the price and the platform tracks the difference between your entry and your exit, so opening a short takes one sell order, the same way opening a long takes one buy order.
Use the same share. You sell 50 CFDs at $180. The price falls to $174 and you buy back. $180 minus $174 is $6, and $6 × 50 is a $300 gain. If the price rises to $185 instead, $180 minus $185 is minus $5, and the trade loses $250.
Long and short in forex: every trade is both
A currency pair prices one currency in terms of another. The first currency is the base and the second is the quote. Buying a pair means buying the base and selling the quote, so buying EUR/USD makes you long euros and short US dollars. Selling GBP/USD makes you short pounds and long dollars.
Take a short trade in pips. GBP/USD is quoted 1.2700 / 1.2701 and you expect the pound to weaken.
- You sell 0.2 lots at the bid, 1.2700. A standard lot of GBP/USD moves $10 per pip, so 0.2 lots moves $2 per pip.
- The pair falls and you buy back at the ask, 1.2650. That is 50 pips in your favour.
- The result before costs is 50 × $2 = $100.
- If the pair had risen and you bought back at 1.2730 instead, you would be 30 pips against you: 30 × $2 = $60 lost.
Notice which side of the quote each step uses. A long opens at the ask and closes at the bid. A short opens at the bid and closes at the ask. Either way you cross the spread once on the round trip, so a short that goes nowhere shows a small loss straight after you open it, just as a long does. Holding costs on overnight positions can also differ between a long and a short on the same symbol, as spreads and trading costs explained.
Why short trades carry extra risk
The maths is symmetrical, but two things make shorts behave differently.
First, the loss on a short has no natural ceiling. A share you buy at $180 can fall at most $180 to zero. A share you short at $180 can keep rising with no upper limit, so without a stop loss the possible loss keeps growing.
Second, crowded shorts can be squeezed. When many traders are short and the price rises, each one who buys back to close adds to the buying, which pushes the price higher and forces more of them out, often in a sudden jump.
A stop loss, from the order types lesson, deals with the first problem for both directions. On a short, the stop loss is a buy stop placed above your entry. On the GBP/USD trade above, a stop at 1.2730 caps the planned loss at $60, though a gap can still fill it at a worse price.
Long, short and the CMC Funded loss limits
On a CMC Funded account the daily loss limit is measured on equity, which includes the floating result of open trades. A short that moves against you uses up that allowance in exactly the same way as a long would. On a $25,000 Direct account the daily loss limit is $1,000, so the $60 loss on the GBP/USD short above would use 6% of the day's allowance. The rules page lists the limits for every account size.
Check your understanding
You sell 30 share CFDs at $95 and buy them back at $91. What is the result before costs?
A $120 gain. $95 minus $91 is $4, and $4 × 30 is $120. The trade was short and the price fell.
You buy EUR/USD. Which currency are you short?
The US dollar. Buying the pair means buying euros and selling dollars.
Where does the stop loss go on a short trade, above or below the entry?
Above. A short loses when the price rises, so the stop is a buy stop placed above the entry price.
Key points
- Long means buy first and sell later; it gains when the price rises.
- Short means sell first and buy back later; it gains when the price falls.
- The result is the price difference times your size, with the sign set by your direction.
- A forex buy is long the base currency and short the quote currency, and a sell is the reverse.
- A short has no natural loss ceiling, so a stop loss matters at least as much as it does on a long.
Next lesson: Trading sessions
All trading is simulated. Rewards are based on performance and are not guaranteed.