Is Going Short Comparable To Going Long?

I recently posted this tweet, which many people seemed to find difficult to understand. Here is a simple example to clarify the concept.

Asset X costs $10. A trader shorts Asset X at its current price with a $10 position. This trader is thrilled when he sees the price drop to $1, and covers (closes the trade), making a profit of $9. Profit on a short is calculated by subtracting the buy price ($1) from the sell price ($10). Simple.

Now let’s say that the trader wants to rebuy $10 worth of the same asset at $1. Price moves to $2 and the trader sells the entire position – for a profit of $10. The price has doubled and so has the value of his investment. He made more on the move from $1 – $2 than he did on the move from $10 – $1. 

Going short and going long are not the same thing! Markets tend to trend up with time, so when you zoom out, a short is almost always a trade against the macro trend. Further, the profit potential of a short with no leverage is capped at 100%. To double your money, the asset has to literally go to 0. The profit potential of a long is theoretically infinite. The value of the $1 position described can increase exponentially. If that simply asset returns to $10, the trader will have made $90 (total value of $100 minus $10 investment).  

Most importantly, going short is a tool meant for professional traders who are immersed in the markets and have a deep understanding of price action. Beginning and intermediate traders are far better off buying dips and enjoying larger movement to the upside. If you are new to trading, don’t even think about shorting.