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Profit from The Falling VS Rising Market: going short and going long
One of the biggest advantages of trading cryptocurrencies is their volatility. However, volatility means that things go both up and down. Traders need to take this into consideration, and learn how to trade both falling and rising markets.
With the market in the downtrend ever since the start of 2020, people need to learn how to trade cryptocurrencies during that period. One most effective way to do so is short selling. Many people, due to lack of general information and only a few brokers offering it, do not know what short selling is.
Short selling (or going short) is a way to profit from a cryptocurrency which is falling in price. It is a complex process of borrowing, selling, and rebuying at a lower price and returning the “debt”, therefor making a profit. Simply put, it is betting on a Cryptocurrency going down. As previously stated, only a handful of exchanges and trading platforms offer short selling as an option.
When going short on a trade, everything is reversed. The lower the cryptocurrency goes, the higher the profits are. If the price goes higher, it may put you in the negative or trigger a stop loss.
Short selling is a perfect way to profit from the falling markets, as it allows you to catch the main bearish trend. Trading with the trend is considered the only consistent way of making a profit when trading any asset class.
We’ve all seen the crypto craze of the mid-late 2020, where the prices of all the cryptocurrencies rose exponentially, and Bitcoin even reached $20,000. This was a good example of a bullish trend. Profiting in a bullish trend is easy, because most of the assets just rise in price. However, optimizing the trades in order to profit in the best way possible is hard.
Going long is a process reverse to short selling. It involves using your funds to bet on cryptocurrencies going up. There is a small difference between buying and going long, which is:
· Buying a cryptocurrency gives you control of that cryptocurrency;
· Going long on a cryptocurrency means you are only betting on it going up, without actually possessing it.
In both cases, the result is the same in terms of profits, and these terms are often used interchangeably. However, going long (though it sounds inferior) has its advantages. Trading platforms that offer going long instead of classic buying are offering margin trading. This way, a trader can utilize it to leverage their position and trade with up to 100x of his capital (PrimeXBT offers up to a 100x leverage).
When going long on a trade, we want the price to go up. The higher the cryptocurrency price goes, the higher our profits are. If the price goes down, it will create losses for us, or even trigger a stop loss.
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Going long is a great way to leverage your positions and ensure maximum profits when it comes to market uptrends.
Both going long and going short have its uses in different market conditions. One does not beat the other in performance, nor are they in a competition against each other. When used accordingly, and preferably with leverage, they are a great way of making amazing profits in a short, medium and long time horizon.
A Guide to Understanding Opportunities and Risks in Futures Trading
Basic Trading Strategies
Dozens of different strategies and variations of strategies are employed by futures traders in pursuit of speculative profits. Here are brief descriptions and illustrations of the most basic strategies.
Buying (Going Long) to Profit from an Expected Price Increase
Someone expecting the price of a particular commodity to increase over a given period of time can seek to profit by buying futures contracts. If correct in forecasting the direction and timing of the price change, the futures contract can be sold later for the higher price, thereby yielding a profit. If the price declines rather than increases, the trade will result in a loss. Because of leverage, losses as well as gains may be larger than the initial margin deposit.
For example, assume it’s now January. The July crude oil futures price is presently quoted at $15 a barrel and over the coming month you expect the price to increase. You decide to deposit the required initial margin of $2,000 and buy one July crude oil futures contract. Further assume that by April the July crude oil futures price has risen to $16 a barrel and you decide to take your profit by selling. Since each contract is for 1,000 barrels, your $1 a barrel profit would be $1,000 less transaction costs.
|Price per barrel||Value of 1,000 barrel contract|
* For simplicity, examples do not take into account commissions and other transaction costs. These costs are important. You should be sure you understand them.
Suppose, instead, that rather than rising to $16 a barrel, the July crude oil price by April has declined to $14 and that, to avoid the possibility of further loss, you elect to sell the contract at that price. On the 1,000 barrel contract your loss would come to $1,000 plus transaction costs.
Note that if at any time the loss on the open position had reduced funds in your margin account to below the maintenance margin level, you would have received a margin call for whatever sum was needed to restore your account to the amount of the initial margin requirement.
Selling (Going Short) to Profit from an Expected Price Decrease
The only way going short to profit from an expected price decrease differs from going long to profit from an expected price increase is the sequence of the trades. Instead of first buying a futures contract, you first sell a futures contract. If, as you expect, the price does decline, a profit can be realized by later purchasing an offsetting futures contract at the lower price. The gain per unit will be the amount by which the purchase price is below the earlier selling price. Margin requirements for selling a futures contract are the same as for buying a futures contract, and daily profits or losses are credited or debited to the account in the same way.
For example, suppose it’s August and between now and year end you expect the overall level of stock prices to decline. The S&P 500 Stock Index is currently at 1200. You deposit an initial margin of $15,000 and sell one December S&P 500 futures contract at 1200. Each one point change in the index results in a $250 per contract profit or loss. A decline of 100 points by November would thus yield a profit, before transaction costs, of $25,000 in roughly three months time. A gain of this magnitude on less than a 10 percent change in the index level is an illustration of leverage working to your advantage.
Assume stock prices, as measured by the S&P 500, increase rather than decrease and by the time you decide to liquidate the position in November (by making an offsetting purchase), the index has risen to 1300, the outcome would be as follows:
A loss of this magnitude ($25,000, which is far in excess of your $15,000 initial margin deposit) on less than a 10 percent change in the index level is an illustration of leverage working to your disadvantage. It’s the other edge of the sword.
While most speculative futures transactions involve a simple purchase of futures contracts to profit from an expected price increase — or an equally simple sale to profit from an expected price decrease — numerous other possible strategies exist. Spreads are one example.
A spread involves buying one futures contract in one month and selling another futures contract in a different month. The purpose is to profit from an expected change in the relationship between the purchase price of one and the selling price of the other.
As an illustration, assume it’s now November, that the March wheat futures price is presently $3.50 a bushel and the May wheat futures price is presently $3.55 a bushel, a difference of 5¢. Your analysis of market conditions indicates that, over the next few months, the price difference between the two contracts should widen to become greater than 5¢. To profit if you are right, you could sell the March futures contract (the lower priced contract) and buy the May futures contract (the higher priced contract).
Assume time and events prove you right and that, by February, the March futures price has risen to $3.60 and the May futures price is $3.75, a difference of 15¢. By liquidating both contracts at this time, you can realize a net gain of 10¢ a bushel. Since each contract is 5,000 bushels, the net gain is $500.
Net gain 10¢ bushel
Part 3: Long or Short ? Order Types And Calculating Profits & Losses
Going long, Going short, Order types, and Calculating Profit & Loss
• Buying and selling
The basic idea of trading the markets is to buy low and sell high or sell high and buy low. I know that probably sounds a little weird to you because you are probably thinking “how can I sell something that I don’t own?” Well, in the Forex market when you sell a currency pair you are actually buying the quote currency (the second currency in the pair) and selling the base currency (the first currency in the pair).
In the case of a non-Forex example though, selling short seems a little confusing, like if you were to sell a stock or commodity. The basic idea here is that your broker lends you the stock or commodity to sell and then you must buy it back later to close the transaction. Essentially, since there is no physical delivery it is possible to sell a security with your broker since you will ‘give’ it back to them at a later date, hopefully at a lower price.
• Long vs. Short
Another great thing about the Forex market is that you have more of a potential to profit in both rising and falling markets due to the fact that there is no market bias like the bullish bias of stocks. Anyone who has traded for a while knows that the fastest money is made in falling markets, so if you learn to trade both bull and bear markets you will have plenty of opportunities to profit.
LONG – When we go long it means we are buying the market and so we want the market to rise so that we can then sell back our position at a higher price than we bought for. This means we are buying the first currency in the pair and selling the second. So, if we buy the EURUSD and the euro strengthens relative to the U.S. dollar, we will be in a profitable trade.
SHORT – When we go short it means we are selling the market and so we want the market to fall so that we can then buy back our position at a lower price than we sold it for. This means we are selling the first currency in the pair and buying the second. So, if we sell the GBPUSD and the British pound weakens relative to the U.S. dollar, we will be in a profitable trade.
• Order types
Now it’s time to cover order types. When you execute a trade in the Forex market it is called an ‘order’, there are different order types and they can vary between brokers. All brokers provide some basic order types, there are other ‘special’ order types that are not offered by all brokers though, and we will cover them all below:
Market order – A market order is an order that is placed ‘at the market’ and it’s executed instantly at the best available price.
Limit Entry order – A limit entry order is placed to either buy below the current market price or sell above the current market price. This is a bit tricky to understand at first so let me explain:
If the EURUSD is currently trading at 1.3200 and you want to go sell the market if it reaches 1.3250, you can place a limit sell order and then when / if the market touches 1.3250 it will fill you short. Thus, the limit sell order is placed ABOVE current market price. If you want to buy the EURUSD at 1.3050 and the market is trading at 1.3100, you would place your limit buy order at 1.3050 and then if the market hits that level it will fill you long. Thus the limit buy order is placed BELOW current market price.
Stop Entry order – A stop-entry order is placed to buy above the current market price or sell below it. For example, if you want to trade long but you want to enter on a breakout of a resistance area, you would place your buy stop just above the resistance and you would get filled as price moves up into your stop entry order. The opposite holds true for a sell-stop entry if you want to sell the market.
Stop Loss order – A stop-loss order is an order that is connected to a trade for the purpose of preventing further losses if the price moves beyond a level that you specify. The stop-loss is perhaps the most important order in Forex trading since it gives you the ability to control your risk and limit losses. This order remains in effect until the position is liquidated or you modify or cancel the stop-loss order.
Trailing Stop – The trailing stop-loss order is an order that is connected to a trade like the standard stop-loss, but a trailing stop-loss moves or ‘trails’ the current market price as your trade moves in your favor. You can typically set your trailing stop-loss to trail at a certain distance from current market price, it will not start moving until or unless the price moves greater than the distance you specify. For example, if you set a 50 pip trailing stop on the EURUSD, the stop will not move up until your position is in your favor by 51 pips, and then the stop will only move again if the market moves 51 pips above where your trailing stop is, so this way you can lock in profit as the market moves in your favor while still giving the trade room to grow and breath. Trailing stops are best used in strong trending markets.
Good till Cancelled order (GTC) – A good till cancelled order is exactly what it says…good until you cancel it. If you place a GTC order it will not expire until you manually cancel it. Be careful with these because you don’t want to set a GTC and then forget about it only to have the market fill you a month later in a potentially unfavorable position.
Good for the Day order (GFD) – A good for day order remains active in the market until the end of the trading day, in Forex the trading day ends at 5:00pm EST or New York time. The exact time a GFD expires might vary from broker to broker, so always check with your broker.
One Cancels the Other order (OCO) – A one cancels the other order is essentially two sets of orders; it can consist of two entry orders, two stop loss orders, or two entry and two stop-loss orders. Essentially, when one order is executed the other is cancelled. So, if you want to buy OR sell the EURUSD because you are anticipating a breakout from consolidation but you don’t know which way the market will break, you can place a buy entry and stop-loss above the consolidation and a sell entry with stop-loss below the consolidation. If the buy entry gets filled for example, the sell entry and its connected stop loss will both be cancelled instantly. A very handy order to use when you are not sure which direction the market will move but are anticipating a large move.
One Triggers the Other order (OTO) – This order is the opposite of an OCO order, because instead of cancelling an order upon filling one, it will trigger another order upon filling one.
• Lot size / Contract size
In Forex, positions are quoted in terms of ‘lots’. The common nomenclature is ‘standard lot’, ‘mini lot’, ‘micro lot’, and ‘nano lot’; we can see examples of each of these in the chart below and the number of units they each represent:
• How to calculate pip value
You probably already know that currencies are measured in pips, and one pip is the smallest increment of price movement that a currency can move. To make money from these small increments of price movement, you need to trade larger amounts of a particular currency in order to see any significant gain (or loss). This is where leverage comes into play; if you don’t understand leverage totally please go read Part 1 of the course where we discuss it.
So we need to know now how lot size affects the value of one pip. Let’s work through a couple examples:
We will assume we are using standard lots, which control 100,000 units per lot. Let’s see how this affects pip value.
1) EUR/JPY at an exchange rate of 100.50 (.01 / 100.50) x 100,000 = $9.95 per pip
2) USD/CHF at an exchange rate of 0.9190 (.0001 / .9190) x 100,000 = $10.88 per pip
In currency pairs where the U.S. dollar is the quote currency, one standard lot will always equal $10 per pip, one mini-lot will equal $1 per pip, one micro-lost will equal .10 cents per pip, and a nano-lot is one penny per pip.
• How to calculate profit and loss
Now, let’s move on to calculating profit and loss:
Let’s use a pair without the U.S. dollar as the quote currency since these are the trickier ones:
1) The rate for the USD/CHF is currently quoted at 0.9191 / 0.9195. Let’s say we are looking to sell the USD/CHF, this means we will be working with the ‘bid’ price of 0.9191, or the rate at which the market is prepared to buy from you.
2) You then sell 1 standard lot (100,000 units) at 0.9191
3) A couple of days later the price moves to 0.9091 / 0.9095 and you decide to take your profit of 96 pips, but what dollar amount is that??
4) The new quote price for the USD/CHF is 0.9091 / 0.9095. Since you are now closing the trade you are working with the ‘ask’ price since you are going to buy the currency pair to offset the sell order you previously initiated. So, since the ‘ask’ price is now 0.9095, this is the price the market is willing to sell the currency pair to you, or the price that you can buy it back at (since you initially sold it).
5) The difference between the price you sold at (0.9191) and the price you want to buy back at (0.9095) is 0.0096, or 96 pips.
6) Using the formula from above, we now have (.0001 / 0.9095) x 100,000 = $10.99 per pip x 96 pips = $1055.04
For currency pairs where the U.S. dollar is the quote currency, calculating profit or loss is pretty simple really. You simply take the number of pips you gained or lost and multiple that by the dollar per pip you are trading, here’s an example:
Let’s say you trade the EURUSD and you buy it at 1.3200 but the price moves down and hits your stop at 1.3100….you just lost 100 pips.
If you are trading 1 standard lot you would have lost $1,000 because 1 standard lot of pairs with the U.S. dollars as the quote currency = $10 per pip, and $10 per pip x 100 pips = $1,000
If you had traded 1 mini-lot you would have lost $100 since 1 mini-lot of USD quote pairs is equal to $1 per pip and $1 x 100 pips = $100
Always remember: when you enter or exit a trade you have to deal with the spread of the bid/ask price. Thus, when you buy a currency you will use the ask price and when you sell a currency you use the bid price.
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