Dangerous Trading: Going Short. Proceed with caution!

By beachbummer | CryptoBeach | 29 Aug 2019


People are generally more comfortable with the idea of trading long, where you buy something to sell it at a later time (hopefully together with a profit!) However, some exchanges and products allow you to do short trades, which is selling something first by borrowing it, then buying it back at a later time to return to the lender.

The risk management for long and short positions is very different and I will just be highlighting what I believe is the most important concept that will affect your Profit & Loss (P&L). When you have a long position, the biggest loss you can make is what you paid for the position. Let's say you paid $100 to buy either BTC or MSFT. The most you can lose is $100 if BTC or MSFT goes bankrupt.

For a short position, the risk is much higher. Let's say you short-sold BTC or MSFT at a price of $1, thinking that the price will fall in the future. However, to your horror, the price goes up to $1.50, then $2.00, and continues on an upward trajectory while you are holding on your short position in the belief that your prediction will come true eventually. By now, you should realise that the most you can lose in a short position is theoretically infinite because there is no ceiling to a price.

How you should protect yourself when trading is to ALWAYS use Stop-Loss orders. Stop-Loss market orders will ensure that you will definitely exit your position the moment your predefined price point is hit, whilst Stop-Limit orders will still only try to exit your position up to a your predefined price point before it stops selling.

Never ever believe that you are smarter than the market and that you will never need Stop-Loss orders because the market is always waiting to teach you a lesson.

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beachbummer
beachbummer

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CryptoBeach
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