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Es Emini Day Trading: The Basics-long Or Short On Your Trades

I often get a chuckle when I see trading programs that claim you can make money in both up and down markets

. Of course you can, when the market is going up you are long a position, and when the market is going down you are short a position. Its pretty simple, at first glance.

But how does it really work?

First let me point out that the mechanisms and terminology for long and short are different when referring to futures contracts as oppose to the manner in which short and long are implemented in trading stocks. Though the end result of both types of transactions is similar, the mechanism for accomplishing a stock short and a futures short are quite different.

When traders who speculate go long, they presume the price will rise in an electronic trading exchange. The idea is fairly simple to explain, let us say the price of the Dow emini (called the YM contract) is trading at 1000 and you buy long, your hope is that the price will go up and you will profit when you sell.

When speculators sell short, they presume the price will fall in an electronic trading exchange. Again, the idea is fairly similar. Lets again say the price of the YM contract is 1000 and you sell short, your hope is that the price will go down and you will profit when you close the position.

So, in essence, in a long position you buy first then sell, and in a short position you sell first then get bought out (called closing out).

We understand now that you can make money buy going long and the market moves upward, and if you sell short and the market moves down. But this is a good news and bad news proposition. If you take a long position and the market moves upward, your profit potential is unlimited, and visa versa for a short position. This makes futures contracts very attractive. But futures contracts are also a dog that bites, and if you go long and the market moves down, in the opposite direction you thought, your potential for loss is unlimited. The same holds true with short positions, if you sell short and the market moves upward, your potential for loss is unlimited.

Uh-oh, this doesnt sound so wonderful after all, does it?

There are measures that all futures speculators employ to limit risk. These are called stops and we will spend some time in a future article about the methods employed using stops to make sure that you dont let a loss destroy your account. Further, proper money management of your future accounts, that is, not taking positions that are inappropriately large for the size of the individuals futures account must be observed to avoid averse outcomes in trading. The important thing in this final paragraph to understand is that we can trade in up and down markets and all traders employ measures to control risk in their trading.

by: David S Adams
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Es Emini Day Trading: The Basics-long Or Short On Your Trades