Long and Short in Margin Trading: How the Two Main Strategies Work

Margin trading offers traders two opposite opportunities — earning profits in both rising and falling markets. This is achieved through the use of long and short positions, which allow market participants to apply leverage to increase potential gains. Let’s understand how exactly long and short work in trading and why understanding these tools is critical for success in margin trading.

What is a Long Position and How to Open It

A long position is a strategy for market optimists. Traders initiate long positions when they expect the asset’s price to rise in the future. The mechanism is simple: buy the asset at the current price, then sell it at a higher price to realize a profit from the difference. However, margin trading allows working with much larger volumes by borrowing funds.

Let’s consider a practical example. Trader Alexander predicts a rise in BTC price. He has 10,000 USDT on his main account. He decides to open a position of 1 BTC at the current rate of 50,000 USDT, using 5x leverage. In this scenario, the platform automatically lends him 40,000 USDT to supplement his own funds. Two days later, the BTC price rises to 52,000 USDT. Alexander sells 1 BTC and repays the borrowed 40,000 USDT. His profit will be 2,000 USDT, calculated as: (52,000 − 50,000) × 1 = 2,000 USDT.

How a Short Position Works

A short position is a strategy for market pessimists. Traders create short positions when they anticipate a decline in the asset’s value. Instead of buying directly, the trader borrows coins, sells them at the current high price, and profits when the price drops — buying the coins cheaper and returning the loan.

Take Boris as an example, who expects BTC prices to fall. With a balance of 10,000 USDT, he decides to sell 0.8 BTC at 50,000 USDT using 5x leverage. The system provides him with 0.8 BTC in debt. Currently, his assets on the account amount to 40,000 USDT (0.8 × 50,000). After two days, BTC drops to 48,000 USDT. Boris buys 0.8 BTC for 38,400 USDT (0.8 × 48,000) and closes his position by returning the borrowed coins. His profit is calculated as: 40,000 − 38,400 − 10,000 = 1,600 USDT*.

Key Differences Between Long and Short in Trading

The fundamental difference between these strategies lies in the direction of speculation. In a long position, the trader borrows funds (usually USDT) and hopes that the purchased asset’s value will increase. In a short position, the trader borrows the asset itself, sells it, and expects the price to fall so they can buy it back cheaper. Both strategies use the same leverage but apply it in opposite directions.

Impact of Fees and Interest on Final Profit

It’s important to note that the above calculations do not account for trading commissions and borrowing interest. In real trading, these costs reduce your net profit. Each buy and sell operation incurs platform fees, and borrowed funds and coins accrue interest depending on the holding period. To understand the detailed expense structure and fee policies, it’s recommended to review the documentation of your trading platform.

Mastering the skills to open long and short positions in margin trading is a necessary step for any trader aiming to diversify their earning strategies in the spot market.

Note: The above examples do not include trading commissions and interest costs.