Revealed: The difference between going long and going short

Fsp Invest Team, 28 May. 2013

Tags: shorting, short trading, going long, difference between going short and going long, single stock futures, trading single stock futures



When trading single stock futures, your futures activity revolves around quickly opening and closing positions with the view to maximise your return in the shortest timeframe possible.

And that’s why understanding the difference between going long and going short is crucial towards your trading success.


As a trader, your share picks are based on short-term factors, such as market momentum or upcoming news flow. You have to take a short-term view and act fast to bank fast profits.
 
According to the Ultimate Single Stock Futures Guide, a single stock future is a far better financial instrument than a normal equity for achieving this goal.
 
But to get to see the rewards far quicker than as a conventional investor, you’ll have to understand the simplest trading strategies out there: Going long and going short.
 
Buying (going long) to maximise returns in a rising market
 
Let’s say you’re a futures trader. You’ll buy the futures contract (go long) if you think the price of a particular equity is going to increase over a period of time and you wish to profit using a single stock futures contract.
 
The reasoning behind this is to buy while the price is low and then sell later when the price of the future is higher. “Get the trade right and you will make a gain. Get it wrong and you’re going to lose money. And, of course, win or lose, the effect of each long trade will be multiplied by the effect of gearing,” says the Ultimate Single Stock Futures Guide.
 
Here an example of a ‘long’ trade: After some technical analysis, you identify that XYZ Holdings has broken back into a bullish channel. You decide to go long XYZ Holdings at a spot price of R230 using the single stock future with an initial target of R238.
 
Your trade would entail: You buy 10 contracts of XYZ Holdings for margin of R20,000 (the same as buying 1,000 shares in XYZ Holdings) at a futures price of R231.45. (To equate your single stock futures trade back to an equivalent share exposure, you multiply the original share price by 100 x 10 contracts.)
 
Your result: XYZ Holdings continues to rally and within two weeks the share is trading at R238. You decide to take your profit on the single stock futures and sell at a futures price of R237.35, thereby closing your trade and making a 29% return on investment.
 
While going long helps you maximise returns in a rising market, going short lets you profit when the share price decreases.
 
Here’s how going short works
 
What you do in this instance is first sell (go short) the futures contract. Then you wait for the price of the future to fall and buy it back at a substantially better rate. The difference between the sell and buy will be your gain.
 
Here’s an example of a ‘short’ trade: A Properties breaks its support trend line after a good run. You decide to go short just after it breaks its upward trend.
Your trade would entail: You sell 10 contracts of A Properties (equal to 1,000 shares) at R17.85 (Margin of R1,400). Your actual exposure is R17,850 with a gearing of 12.75 times.
 
Your result: A Properties rapid fall slows and you decide to buy back your short position at R16.80 making a R1,050 profit or 75% return on your margin.
 
Understanding the difference between going long and going short is crucial towards guaranteeing your trading success when trading derivative instruments like single stock futures.

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