"'Long and short selling in trading', what does that mean?" you may ask. We at Leeloo Trading explain the 'long and short' of long and short selling, in day trading and futures trading!
What is short selling in futures trading?
Short selling in futures trading is a way to speculate on the price of a financial asset (such as a commodity or currency), going down in the future.
When you short sell, you borrow the asset from someone else, sell it on the market and then buy it back at a later date to return it to the lender.
The hope is that the price of the asset will have gone down in the meantime, allowing you to buy it back at a lower price and pocket the difference as profit.
Why would someone want to short sell?
There are a few reasons why someone might want to short sell.
One reason is to hedge against potential losses in other investments. For example, if you own a lot of stock in a company that is heavily dependent on the price of oil, you might short sell oil futures as a way to offset the risk of your stock losing value if the price of oil goes up.
Another reason to short sell is to speculate on the price of an asset going down. This can be based on fundamental analysis, such as believing that a company's earnings will decline, or technical analysis, such as noticing a pattern in the asset's price chart that suggests a downward trend.
How does short selling work in the futures market?
The futures market is a market where people buy and sell contracts to buy or sell an asset at a future date and at a predetermined price.
When you short sell in the futures market, you are selling a futures contract that obligates you to buy the asset at a future date.
For example, let's say you think the price of corn is going to go down. You could short sell a corn futures contract that obligates you to buy corn at a certain price in three months.
If the price of corn goes down as you anticipated, you can buy the corn back at a lower price and pocket the difference.
If the price of corn goes up, however, you will have to buy it back at a higher price and will lose money.
What are the risks of short selling?
Short selling carries with it the risk of unlimited losses. This is because, in theory, the price of an asset could keep going up indefinitely, requiring you to keep buying it back at an ever-increasing price.
In contrast, when you buy an asset, your potential losses are limited to the amount you paid for it.
Another risk of short selling is that you may have difficulty finding someone to lend you the asset you want to short sell. This is especially true for less liquid assets, such as small cap stocks.
Finally, short selling is not for everyone. It requires a high level of risk tolerance, and a good understanding of the market and the asset you are shorting.
If you are not comfortable with these risks, it is probably best to stick to traditional long positions, where you buy an asset with the hope that its price will go up.
What is 'Going long' in futures trading?
'Going long' in futures trading is a way to speculate on the price of a financial asset, such as a commodity or currency, going up in the future.
When you go long, you buy the asset with the hope that its price will increase, allowing you to sell it at a higher price and make a profit.
Why do you 'Go long' in futures trading?
There are a few reasons why someone might want to go long.
One reason is to hedge against potential losses in other investments. For example, if you own a lot of stock in a company that is heavily dependent on the price of oil, you might go long on oil futures as a way to offset the risk of your stock losing value if the price of oil goes down.
Another reason to go long is to speculate on the price of an asset going up.
This can be based on fundamental analysis, such as believing that a company's earnings will increase, or technical analysis, such as noticing a pattern in the asset's price chart that suggests an upward trend.
How does going long work in the futures market?
The futures market is a market where people buy and sell contracts to buy or sell an asset at a future date and at a predetermined price.
When you go long in the futures market, you are buying a futures contract that obligates you to buy the asset at a future date.
For example, let's say you think the price of corn is going to go up. You could go long on a corn futures contract that obligates you to buy corn at a certain price in three months.
If the price of corn goes up as you anticipated, you can sell the corn at a higher price and make a profit.
If the price of corn goes down, however, you will have to buy it at the higher price and will lose money.
What are the risks of going long?
Going long carries with it the risk of losses. This is because, in theory, the price of an asset could go down indefinitely, causing you to lose money on your investment.
Another risk of going long is that the futures contract you bought may expire before the price of the asset goes up.
This is especially true for longer-term contracts, which may expose you to price fluctuations over a longer period of time.
Finally, it is important to manage your risk when going long. This may include using stop-loss orders to automatically sell your position if the price of the asset falls below a certain level, or by setting limits on the amount of money you are willing to lose on any given trade.
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