Trading position is one of the basic terms in the field of cryptocurrencies and is generally a common term in financial markets. Trading Position, indicates the point of entry and exit to transactions.
In the subcategory of trading positions, there are types of positions that we have discussed in this article and some of the issues surrounding this term, including the relationship between trading positions and trading strategies.
For an informed presence in the market of financial currencies, especially the market of cryptocurrencies, please accompany us until the end of this short article and increase your information in the field of this widely used term.
In this article we will cover:
- What is a trading position?
- Different types of trading positions
- Long Position
- Short Position
- Neutral Position
- Profits from trading positions
- The risk of each trading position
- The relationship between trading positions and trading strategies
What is a trading position?
Position in financial markets, including the digital currency market, refers to the value of a financial instrument. This instrument may be securities, digital currency or such things that the trader can buy and sell.
Traders in financial markets appear in two roles: buyer and seller.
If the trader intends to buy the desired asset, he takes a trading position or the same position through a purchase order or opens a so-called position. A trader places a purchase order due to his expectation of an increase in the price of a particular asset or the possibility of its value rising in the future.
In another case, a trader in the role of a seller closes the trading position or, in other words, removes it from his control through a sell order. In any case, all positions opened in the financial markets, including the cryptocurrency market, will be closed in a short or long time. In each trading position, the purchase and sale of assets is accompanied by two actions, put and call.
Different types of trading positions
Types of trading positions are divided into three main categories:
- Long
- Short
- Neutral.
In the following, we will examine these three cases and after that we will have an overview of the profit and loss mechanism of each of the mentioned positions:
Long Position
A long-term position is a position in which a trader holds an asset or contract for a long period of time. Traders in such a situation gain by owning or holding an asset when its price increases and lose when its price decreases.
Long trading positions are also called buy positions.
Short Position
A trader in a short position expects to make a profit by selling his asset in a downtrend. In other words, he enters the transaction when there is a downward trend, then he profits from the price drop.
This situation is called entering the shorts position. In a short or short-term position, also known as a sell position, traders sell the owned or borrowed asset at a high price and buy it at a lower price in the future.
Short position has different methods, one of the most important methods is the possibility of borrowing.
In this way, the trader borrows a certain amount from a lending or defi platform and then sells it and returns it when the price of the asset drops to the desired amount. You will understand this situation better with the following example:
Let’s say that the trader borrows 200 units of digital currency X with a total value of 1000 dollars, i.e. 5 dollars per unit, from the lending platform and sells it in a short position at the same price, then waits for the price of each unit of the borrowed currency to reach 3 dollars.
In this case, he buys and returns 200 units of borrowed digital currency with a value of 600 dollars, in which case he earns a profit of 400 dollars.
Neutral Position
Neutral position means the simultaneous presence of both short and long positions in the trader’s portfolio.
This situation should not be considered a trading position. Rather, it is a strategy that helps manage risk and is able to lower possible losses, especially for a beginner trader.
Profits from trading positions
The profitability of long and short trading positions depends on correct predictions of the short-term or long-term trend of an asset’s price.
These forecasts are made according to technical and fundamental analysis. Technical analysis refers to the examination and study of charts and indicators, and macroeconomic indicators are examined in fundamental analysis.
Up and down price trends do not play a role in the profit of a neutral position. Rather, the profit of this position is determined based on secondary parameters such as volatility or exchange rates, interest rates and central banks.
If you choose and adopt a neutral position, the market concerns will be removed, but you should keep in mind that as this situation lowers the risk, it will also reduce the possibility of large and astronomical profits.
The risk of each trading position
By opening a trading position, traders expose their assets to the market. This situation includes different forms of transactions, both buying and selling.
A position can be held open for minutes or years. Naturally, a longer period of time increases the risk of the transaction. There is also the occurrence of negative fluctuations in this situation, which is important in both long and short positions.
The amount of asset value allocated to an open position has a direct relationship with its potential loss.
In other words, the more assets allocated to a position, the greater the potential losses of the transaction. Usually, more risk-averse traders will open more open positions.
Closing the deal at the right time is the only way to lower the risk in such a situation.
In a brief explanation, it can be said that an increase in price threatens short trades, and what makes a long position risky is a decrease in price. Of course, price reduction in critical conditions is harmful even for short positions.
The relationship between trading positions and trading strategies
Regarding the relationship between Trading Position and trading strategies, it should be said that this term has a meaning with spot trading.
In such a way that a certain amount of assets is bought or sold at an open or closed time point, but the role of the exchange and the exchange platform is also important.
Through its facilities, an exchange can provide traders with the possibility of buying and selling future contracts, forwards and other related items with a variety of long and short positions.
In addition to the above, leverage is a great way for professional traders to make huge profits.
Finally, in a highly volatile market, professional traders pay attention to price tops and bottoms in addition to the market trend. In this way, it is possible to buy an asset when the price is falling and then sell it when it is testing the resistance levels.
In this article, we tried to explain the concept of trading position and some related issues such as types of trading positions (long, short, neutral) in a simple and clear language.
In addition to this, we also discussed the profit and loss of trading positions and their relationship with trading strategies.