Torn between Shorts and Longs? Here’s Why You Should Play Both

Every trader knows that diversification in financial markets is a crucial element of success, and employing various trading strategies can pay off. The old market saying was confirmed by the latest data from the retail trading platform, Capital.com, which shed light on an emerging trend in the UK. Specifically, those who adopted a mix of both long and short trading positions during the first half of 2023 outperformed traders who chose a single-direction approach.

Mixing Long and Short Trades Yields Better Returns

Capital.com analyzed the performance of almost 5,000 active traders during the first six months of 2023. The data showed that traders executing both long and short trades had better returns than those sticking to just one side of the market.

Only 42% of short- and 46% of long-only traders made a profit. In contrast, traders employing both long and short strategies saw more than 50% profit. For those utilizing a mix, the optimal long-short ratio ranged between 50% and 70% in favor of long positions. The study reported a -13% ROI for long-only traders and a -8% ROI for short-only traders. Meanwhile, mixed-strategy traders showed a relatively strong -0.9% ROI.

“Markets never move in one direction forever and the first half of 2023 showed this to be true,” Daniela Hathorn, the Senior Market Analyst at Capital.com, commented. “As markets walked a tightrope between economic recovery and lower stock market returns, UK traders responded by moving away from long-only or short-only trades to incorporate both long and short positions to their trading strategies.”

This indicates that combining both strategies is advantageous in the current market environment, which has been bearish overall but punctuated by sharp rallies.

Shifting Retail Trading Behavior

Data also indicate a significant shift in the behavior of retail traders in the UK. The percentage of long-only traders on the Capital.com platform dropped from previous years, falling from 44% and 50% in past years to just 28% in the first half of 2023. This decline suggests that retail traders are increasingly avoiding a long-only bias.

“Our data affirms how UK traders are adapting their strategies as we enter what appears to be a bearish market where opportunities to derive value from rising markets are reduced,” Hathorn added.

In the first half of 2023, UK traders were frequently net-long on stocks like Bed, Bath & Beyond and AMC Entertainment Holdings. However, they expressed a net-short sentiment in FX pairs and major indices like the DAX40 and Dow Jones.

“2023 has seen the resurgence in meme stocks with new players coming onto the scene. Despite the 2021 fan favorites having been crushed since their heyday, it’s common to see traders flock to the popular meme stocks in case they are also part of the resurgence in risk appetite,” the Senior Market Analyst at Capital.com concluded.

The data highlights the need for diversification and not relying on bullish-only strategies. The poor performance of long traders signals traders may need to acquire new skills, including short selling.

Time and Diversification Boost Retail Traders’ Profits

Another recent study by Capital.com, released in June, shows that traders who spread their investments across multiple asset classes and hold positions for longer durations see better returns.

Table: Trading commodities first gave the highest success rate

The study, which analyzed the trading activities of 100,000 global clients from May 2022 to April 2023, revealed that such diversified traders were successful in 60% of their trades. On the other hand, traders who specialized in a single asset class saw profits in just 48% of their trades.

In other company news, the executive team has had several key changes over the past few months. Simone Manni was recently named the Head of Commercial Marketing for Europe. Before that, Niamh Byrne, formerly of IG Group, was appointed Head of UK and Ireland. Additionally, Greg Adams has been hired as the Head of Risk, further strengthening the leadership team.

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