Long and Short Positions in Forex

What Does Going Long And Short Mean?

When trading in the financial markets, people buy and sell assets such as currencies, commodities and stocks by “going long” or “going short” on them. Going long is a popular industry term used to describe the act of buying. On the flipside, going short is a term investors and traders use to describe the act of selling. Traders will go long when they expect that the price of the asset will rise. Alternatively, they go short when they expect that the price will fall. This is because in forex, as well as all other markets and businesses, traders make their profits when they buy low and sell high.

So, for example, if someone goes short on the EURUSD, they are expecting the price of the EUR to fall so that they buy it at a lower price and make a profit. Losses are incurred in the event of buying low and selling even lower, or selling high and buying even higher. Whether traders buy or sell first doesn’t matter, profits and losses can be made in any order.

There are two more equations to remember:

Long means buy

If you want to buy a currency (meaning that you want to BUY the base currency and SELL the quote currency) at one price and sell it later on at a higher price, then you are in trade’s talk taking a “long position” or “going long”. 

Short means sell

If you want to sell a currency (meaning that you want to SELL the base currency and BUY the quote currency) in order to buy the base currency back at a lower price as soon as the base currency decreases in value, then you are taking a “short position” or “going short” .

The Difference Between Long and Short Trades

The simplest way to explain “long” and “short” trades is to say that in any trade, you are long of that from which you will profit if it rises in relative value, and short of that from which you will profit if it falls in relative value.

Long vs Short Position

For example, let’s say that you buy a stock of ABC Inc. with U.S. dollars. It can now be said that you are “long” stock of ABC Inc. and “short” of U.S. dollars. This is because for you to profit, the value of the ABC Inc. stock must rise against U.S. dollars, or alternatively, the value of the U.S. dollar must fall against the stock of ABC Inc.

In a trade where you are short of a currency against some tangible asset, you would usually refer to that only as a “long” trade, and not say that you were “short” of the cash denomination. I will talk more about that later.

Another way to understand the difference between long and short trades is that if you make a trade where you want the price to rise in a chart, you are long of that instrument. If you want the price to fall in a chart, you are short of that instrument.

Long Position

A long position in forex trading is when a trader buys a currency with the expectation that its value will increase over time. In other words, the trader is betting that the currency will appreciate in value. When a trader takes a long position, they are essentially buying a currency pair, which means they are buying one currency and selling another currency at the same time. For example, if a trader buys the EUR/USD currency pair, they are buying euros and selling US dollars.

To take a long position, a trader needs to have a bullish outlook on the currency pair they are trading. This means they believe that the base currency will appreciate in value compared to the quote currency. The base currency is the first currency in the currency pair, and the quote currency is the second currency. For example, in the EUR/USD currency pair, the euro is the base currency, and the US dollar is the quote currency.

When a trader takes a long position, they make a profit if the currency pair’s value increases. They can then sell the currency pair at a higher price than they bought it for, making a profit on the difference. However, if the currency pair’s value decreases, the trader will make a loss.

Short Position

A short position in forex trading is when a trader sells a currency with the expectation that its value will decrease over time. In other words, the trader is betting that the currency will depreciate in value. When a trader takes a short position, they are essentially selling a currency pair, which means they are selling one currency and buying another currency at the same time. For example, if a trader sells the EUR/USD currency pair, they are selling euros and buying US dollars.

To take a short position, a trader needs to have a bearish outlook on the currency pair they are trading. This means they believe that the base currency will depreciate in value compared to the quote currency. When a trader takes a short position, they make a profit if the currency pair’s value decreases. They can then buy the currency pair at a lower price than they sold it for, making a profit on the difference. However, if the currency pair’s value increases, the trader will make a loss.

Margin Trading

In forex trading, traders can take both long and short positions using margin trading. Margin trading allows traders to control large amounts of currency with a relatively small amount of money. This is because traders only need to put down a fraction of the total value of the trade as a deposit. This is known as the margin requirement.

For example, if a trader wants to trade $100,000 worth of currency, they may only need to put down a margin requirement of $1,000. This means they are controlling a lot of currency with only a small amount of money. However, margin trading can be risky, as losses can also be magnified.

Factors Affecting Long or Short Positions

Opening a short or long position requires a deep understanding of market analysis. If you are new in this industry, you must learn what factors affect long and short positions.

Technical Analysis

Technical analysis is a process of anticipating the future price of an asset based on its past behavior. You can master technical analysis by learning trading theories like support/resistance, price patterns, candlestick analysis, order flow, order block, supply-demand, Fibonacci’s, etc.

Fundamental Analysis

Fundamental analysis is a process of anticipating the future price based on the fundamental perspective.

There are many economic events and fundamental releases to affect the forex market that you should consider while making trading decisions.

Some of such events are:

  • Central bank interest rates
  • Unemployment reports
  • Inflation reports
  • Gross Domestic Product (GDP) reports

Keep an eye on these reports, other relevant news, and financial analysts’ thoughts on what could come about. To understand how it works, check the fundamental analysis section.

Going long vs going short summed up

  • Going long or short are two opposite sides of a trade in which one involves buying the underlying asset while the other side includes borrowing and selling it
  • When you go long, you believe that the market price will rise so you buy the financial asset with the aim of selling it at a higher price
  • If you go short, you believe that the market price will fall and subsequently borrow the underlying asset to sell, then buy it back at a lower price to return it to the lender
  • You can take a long or short position on different markets including shares, indices, commodities and forex
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