Understanding Trading Positions and Managing Risk

Region: Europe
Jan 4, 2024, 12:09:16 PM Published By Yves Renno

For Wirex’s focus this month, we’re teaching you how to ‘trade like a pro’. So where better to get this info from than Wirex’s Trading team? 

This guide will introduce you to two important concepts: long and short positions. We’ll discuss effective risk management strategies to help you navigate the world of trading. Understanding these fundamentals is crucial for making smart trading decisions, and are especially relevant when dealing with Wirex's new products such as Multiply and DUO.* Don't worry, we've kept things simple and straightforward so that you can easily follow along. 

What is a Position? 

Let's begin by defining a "position" in the trading market. A position refers to the amount of an asset, such as a stock or cryptocurrency, that you own or agree to sell. It also reflects your market outlook, indicating whether you believe prices will rise or fall. Moreover, a trader's position reveals the size of their investments or assets. It's important to note that you only realise a profit or loss when you sell these assets, transitioning from an "open" to a "closed" position. 

Long & Short Position Fundamentals 

Now, let's delve into the concept of a long position. If you anticipate that the price of an asset will increase over time, you will take a long position. This means you buy the asset with the intention to hold onto it, expecting its price to rise. For instance, let's say you believe that Bitcoin's price will soar, so you decide to purchase 2 Bitcoins at $30,000 each, amounting to a total investment of $60,000. By taking a "long" position on Bitcoin, you stand to profit if BTC’s price surges to $40,000. If you decide to sell at this point, your profit would be $20,000 (($40,000 x 2) - $60,000). 

Conversely, a short position is adopted when you expect the price of an asset to decline. In this case, the goal is to profit from the price decrease, often through strategies like short selling. Let's assume you anticipate a drop in Bitcoin's price. You can borrow 1 Bitcoin from your broker and sell it for $30,000. If the price indeed falls to $20,000, you can repurchase the Bitcoin at the lower price and make a profit of $10,000. 

Wirex's new Multiply product lets users set a Stop-Loss and Take-Profit level. This feature automatically closes a short or long Multiply position, providing traders with greater control over their exit strategies. By implementing these predefined levels, traders can mitigate the influence of emotions when executing trades. Additionally, it offers protection against execution risks, which is especially crucial in the dynamic and fast-paced crypto market.** 

Risk Management & Responsible Trading 

Now that you understand the concepts of long and short positions, let's shift our focus to managing risk and trading responsibly. Effective risk management is a vital aspect of trading, as it involves taking measures to limit losses and protect your trading capital. Responsible trading, on the other hand, involves being in control of your trades and accepting the outcomes of your trading decisions. To help you trade responsibly, here are some simple yet essential tips: 

1. Stay Disciplined 

Avoid the temptation to engage in impulsive trading or gamble with your trades, especially when you're facing losses. Remember, trading is not about making quick money; it's about making informed decisions based on sound analysis. 

2. Keep Learning 

The world of trading, particularly in the realm of cryptocurrencies, can be complex and ever evolving. Stay ahead by continuously expanding your knowledge. There are numerous resources available, such as Wirex's weekly market updates shared on Discord. Stay informed about current market news that could potentially impact the market positively or negatively. 

3. Protect Your Capital 

It's crucial to take proactive steps to prevent significant losses that could deplete your trading capital. Wirex's new Multiply product allows users to set their Positions Stop-Loss and Take-Profit levels. These features enable you to tailor your positions according to your personal risk profile, providing an additional layer of protection. 

4. Know When to Stop 

If you find yourself trading compulsively in an attempt to recover losses, it's time to take a step back. It's essential to maintain awareness of your trading habits and have plans in place to prevent compulsive trading. Trading should be approached with a clear and rational mindset. 

So as you can see, understanding long and short positions, as well as employing effective risk management strategies, is crucial for navigating the fast-paced world of trading. By adopting responsible trading practices and making informed decisions, you increase your chances of generating profits. Nevertheless, it's important to remember that trading always involves risks, and you should never risk more than you can afford to lose. 

*Crypto products, including Wirex DUO and Wirex Multiply, can be risky for users. The value of your assets may change significantly and lead to a total loss, and there may be no regulatory recourse for any loss from such transactions. Please do your research thoroughly. Subject to the T&Cs and Privacy Policy. 

**The prices of Cryptoassets fluctuate, sometimes dramatically. The price of a Cryptoasset may move up or down, and may become valueless. It is as likely that losses will be incurred rather than profit made as a result of buying and selling Cryptoassets.