ES Emini: Long and Short Positions

I have received a startling amount of email in recent weeks requesting clarification on the terms long and short trading.  As these concepts are among the most basic, and fundamental strategies employed by traders I thought it might be wise to take a moment and explore the meaning of long and short trades and the implications of each trade.

Note: For the purposes of this article we will be referring only to futures trading, specifically index futures contracts.  While the concepts we will discuss are similar in stock and option trading, there are differences that are significant.

Long

When a trader enters a trade long he/she is hoping for the price of the contract to go up.  It is often called buying, in lieu of “going long.”  Either term is correct when referring to this type of trade.  Most traders have a preset idea how far they intend to let the trade appreciate before they exit for a gain, or profit.  Conversely, a certain level of loss tolerance is usually established should the trade not go up, or appreciate, and the trader exits to minimize his loss.  Generally speaking, a trader should never risk more than five percent of his working capital on a given trade, even less is better.  To summarize, a trader buys or “goes long” with the idea the market is going up and the trader hopes to capitalize on the up market by purchasing contracts for the potential appreciation in the contract price.

Short

When a trader enters a trade short he/she is hoping for the price of the contract to decline.  It is the exact opposite of going long a trade, where the trader is hoping for price appreciation.  In a short trade, the trader expect the price to depreciate or decline.  Entering a trade short is sometimes referred to as selling short.  This has its origin in stock trading, but it is important to note that short trading in stocks is far different than selling short in futures contracts.  An entirely different set of SEC rules govern short selling in stocks.  Don’t confuse the two.

It is important to note that all traders should have a set of criterion for selling short or going long, and they use these criteria to decide which direction the market may be headed.  This methodology varies greatly from trader to trader and is generally considered a traders style.

For me, I consider myself a scalper, which is a trader who trade in very short intervals, usually three to six minutes per trade, and hopes to capitalize on intraday movement in the market.   Other traders have a much longer view of the market and may enter trades with the idea of holding the contract for days, weeks, even months.  Each trader devlops his own style, which is usually a reflection of his individual personality.