Understanding Long and Short Positions in the Market

CA Manish Singh: 
Hello everyone, and welcome to Chapter 18. In this session, we will learn the basic terminology used when trading in the markets. Since we are in the Futures segment, we will also understand what each term means in the context of Futures trading. 

Let us begin with two of the most fundamental concepts: going long and going short. 

What Going Long Means 

Going long simply means taking a bullish position. 
If I say I am long on Nifty, it means I expect Nifty to move higher and I will benefit only if the price rises. 

A trader is considered to be long in four possible scenarios: 

1. You physically hold the stock.
2. You buy Futures.
3. You buy a Call option.
4. You sell a Put option. 

We will discuss options in detail in later chapters, so for now, remember that these four combinations reflect a long or bullish bias. 

What Going Short Means 

Going short in the market means taking a position with the expectation that prices may fall. 

This can happen in two ways: 

1. You sell with the intention of buying back later at a lower price.
2. You enter specific Futures or Options positions that benefit from a fall. 

For example, you may short the market by: 

• Selling a Futures contract
• Buying a Put option
• Selling a Call option 

Any of these would indicate a short position. 

It is important to distinguish between profit booking and shorting. 
If you sell a stock because you no longer wish to hold it, that is profit booking. 
If you sell a stock with the intention of buying it back at a lower price, that is shorting. 

When Do Traders Short the Market 

Traders may short the market when: 

• They expect a short term correction.
• They anticipate a downward move after a result or news event.
• They identify weakness using technical indicators.
• The broader sentiment suggests limited upside. 

Shorting works best in phases where the trend weakens temporarily. 

Risks Involved in Shorting 

Shorting carries additional risks because the primary trend of markets is usually upward. If your judgement is slightly off, the price may rise before falling, and you may not get the chance to exit comfortably. This may trigger your stop loss or lead to larger than expected losses. 

Another major risk is shorting without owning the stock. If you short a stock in the cash market without holding it, and are unable to deliver it during settlement, the exchange will buy the shares on your behalf through the auction mechanism. The penalties can be steep, often between 20 and 25% depending on the stock. 

This is why short selling in the cash market without ownership can be extremely risky. 

Why Many Traders Still Short the Market 

Despite the risks, shorting has become a significant part of modern trading. 
Earlier, most participants would only buy and hold. Today, traders use advanced technical analysis and options data to identify opportunities in all kinds of market phases. 

For example, intraday movement often includes: 

• A bullish hour
• A sideways hour
• A bearish hour 

Traders now understand that each of these phases can offer profitable opportunities. With training, analysis and discipline, shorting can become an effective tool just like going long. 

How to Decide When to Go Long or Short 

In the next chapter, we will look at real chart examples and learn how technical analysis helps us decide whether to go long or short in Futures. You will understand how trend, momentum and price structure guide this decision-making process. 

Disclaimer: Investments in securities markets are subject to market risks. Read all related documents carefully before investing.