The attitude of traders to the cryptocurrency market plays an important role in the formation of price movements and investment behavior. The psychological state and emotions can contribute to their decisions to buy or sell digital coins, as well as to meet the needs of trading. This is why the inclusion of the “mood” in the trading strategy is significant.
When the long/short metric is high, it means that more traders are opening buy positions, which may indicate a positive sentiment among traders and expectations of price growth. But it is important to also not to forget, when the long/short metric is low, it is a direct indicator of a negative mood, which potentially leads to the price drop.
This guide provides more information on three most important aspects of the cryptocurrency trading:
- The importance of the “mood” of traders and its inclusion in the trading strategy;
- Explanation of Long and Short positions, their role in different markets and how they correspond with prices;
- An explanation of the Long to Short ratio as a tool for analyzing trader sentiment and its use to determine the direction of the market trend.
Incorporating a long/short metric into a trading strategy can be useful for gaining additional information about market sentiment.
Long and Short trading positions
Both long and short positions can be categorized as trading strategies, where traders are buying and selling digital assets pursuing one goal – getting profit. For better understanding of the crypto long short ratio, here is a basic description of how it works:
- Long position. This is a position in which a trader is buying the asset by having a hope for further growth. Such a trader believes that an asset has a positive perspective and hopes to sell it in the future for a higher price by getting a profit from the difference between the buying and selling prices;
- Short position. This is a position in which a trader is selling the asset he does not own by having a hope for a further price lowering. Such a trader believes that an asset has a negative perspective and hopes to buy it back in the future, when the price will be lower. In this case, the profit from Bitcoin shorts can be received from the difference between the selling and buying prices.
It is very important to notice that such positions can be opened on different markets:
- The Marginal Market. In this case, traders are using the borrowed capital in order to open more positions than they have on their balance. In this case, Long Short BTC positions are used for buying and selling of the assets with the usage of borrowed money;
- The Futures Market. Futures represent a deal to buy or sell an asset at a certain price in the future. Traders can open long and short positions on the futures market by entering into the relevant contracts;
- The Options Market. Traders can use options to open long positions to buy an asset and short positions to sell an asset for a specific price in the future. There are no specific requirements for such a contract.
Regarding the impact of long and short positions on asset prices, there is a concept of “Bull Market” and “Bear Market”:
- Bull Market. In this case, the number of longs is significantly bigger than the number of shorts. By opening more long positions, traders are creating a demand for an asset, which leads to the higher price;
- Bear Market. It is characterized by the number of shorts that significantly outnumber longs. By opening more short positions, traders are creating an offer dynamic for an asset, which leads to the lower price factor.
All these concepts apply to both the traditional stock, currency market and modern digital assets.
Short Long Ratio Explained
The ratio of short and long positions, known as the Short-Long Ratio, is a sentiment analysis tool for traders that helps identify the direction of the market trend. This indicator compares the number of open long positions with the number of open short positions.
If the GMX Long Short Ratio is low, it means that the market is dominated by shorts, that is, traders are more inclined to sell assets. Conversely, if the indicator is high, longs are preferred, and traders are more than willing to buy assets.
How It Is Calculated
The Short-Long Ratio is calculated by comparing the number of open short positions with the number of open long positions. The result is expressed in percentages or relative values that indicate the relationship between these positions. For example, if there are 100 open short positions and 200 open long positions in the market, the Binance Futures Long Short Ratio will be 0.5 (100/200). This means that the number of shorts is half the number of longs.
The Short-Long Ratio indicator can be applied to different types of markets. It can measure the ratio of positions in the general cryptocurrency market or on a specific exchange. It can also be used for futures and margin markets to gauge trader sentiment and identify potential trends.
BTC Long Short Ratio Example
On the BTCMan website, you can find a metric for the BTC Long Short Ratio. It gives the information on the the ratio of “Long” and “Short” positions of traders on the Bitcoin market, here is an example of how to work with this metric in case of this site:
- Website and the interface. Open the https://btcman.io/metrics/longshort link on your browser and you will find the BTC Long/Short Ratio chart for a specific period of time. Pay attention to the vertical axis (Y) of the chart as it shows the ratio interest;
- Indexes. The values of the Bitcoin Long Short Ratio are presented as percentages or numerical values that show the ratio between open long and short positions in the BTC market. Indicators are expressed as the ratio of “long” to “short” or as the ratio of open “long” positions to the total volume of open positions on different exchange websites, such as Binance, OKX, Bybit or any other platform. For example, if the ratio is equal to 60%, it means that open “long” positions are 60% of the total volume of open positions in the BTC market for a particular website.
- Chart Analysis. A high value of BTC Long Short Ratio (More than 50%) may indicate a predominance of optimistic sentiments of traders, where the majority of open positions are “long”. For shorts, it works in reverse.
Overall, the Long Short Ratio presented at BTCMan is a useful tool for exploring trader sentiment in the Bitcoin market. By analyzing indicators and their changes over time, you can gain additional insights into market direction and possible trending movements in the price of a digital asset.
ByBit Long Short Example
BTCMan provides valuable information for people who are on the fence when it comes to buying or selling Ethereum on the ByBit website. Here is how to work with the ByBT Long Short metric available in the form of a chart. The basic example looks like this:
- Website and the interface. Access the https://btcman.io/metrics/longshort link on your browser and you will find the ByBit Long Short Ratio chart for a specific period of time. Pay attention to the vertical axis (Y) of the chart as it shows the ratio value;
- Indexes. The chart you are seeing on the site represents the values of the ratio between open long and short positions on the ByBit for Ethereum exchange. For example, if the ETH Long Short ByBit is equal to 53.66%, it means that open “long” positions are 53.66% of the total volume of open Ethereum positions on the exchange website;
- Chart Analysis. A high value of the ratio indicates the prevalence of optimistic sentiments of traders, where the majority of open positions are “long” and the low value of the ratio indicates the prevalence of pessimistic sentiments of traders, where the majority of open positions are “short”.
A change in the value of the ratio on the chart indicates a change in trader emotions and possible changes in the direction of the ETH price on the ByBit exchange.
How to use the Long to Short ratio metric
The Long Short Ratio metric determines the ratio between the “long” and “short” positions of traders in the market. This metric can provide traders with additional information about market sentiment and potential trend movements in an asset's price. When the Short Long Ratio is high, it means that most traders have “long” positions, which indicates an optimistic mood and expectations of an increase in the price of the asset. This may be an indicator of the continuation of a positive trend.
On the other hand, a low Long/Short Ratio may mean that most traders have “short” positions, indicating a pessimistic mood and expectations of asset price lowering. This may be a sign of an overheated market and a possible reversal of the trend.
Traders can use the Long/Short Ratio Indicator to make position management decisions. For example, when the ratio is high, traders should enter long positions or hold already open long positions. Alternatively, with a low Long to Short Ratio, traders may consider entering "short" positions or holding already open "short" positions.
It is recommended for traders to consider using other metrics and analysis tools to obtain a more complete and objective view of the market strength. The most convenient way of doing so is by using the tools of the BTCMan website, like Screener to compare the charts of multiple assets simultaneously and build strong technical analysis as a result of direct comparison.