Forex Trading - Long Position And Short Position
Have you ever read through a trading article that uses the terms long and short, confused because it doesn’t refer to the length of the trade? No issues, this post will discuss long and short positions and how they apply to Forex trading.
A long position is another name for a buy position, when going long (buying) you expect prices to increase. A short position is another name for a sell position, when going short (selling) you expect prices to fall.
Traders will go long a financial instrument when they believe there is demand in the market and will go short if they believe there is supply in the market.
Long trade (buy) example- USDCHF H4
Short trade (sell) example- CADJPY H1
You may also come across the term’s “bulls” and “bears”. Bulls are traders who enter long positions and bears are traders who enter short positions.
How long positions and short positions apply in Forex trading
In most markets, traders have a bias to go long because markets are expected to appreciate over long periods, however, Forex trading is different as it involves trading the exchange rate between two currencies, therefore, short trades are more common.
Forex traders can easily trade either long or short, all that’s needed is for one currency to appreciate/ depreciate vs the other, instead of requiring the overall market to move in a specific direction.
Let me explain why. When going long (buying) a currency pair, you expect the base currency to appreciate and the quote currency to decline e.g. if you buy USDJPY then you expect the USD to increase in value and the Yen to decrease in value, by going long you are buying the USD and selling the Yen.
Going short (selling) a currency pair means you expect the base currency to decline and the quote currency to apricate e.g. selling USDJPY, you expect the USD to decrease in value and the Yen to increase in value, thus by going short you are selling the USD and buying the Yen.
Therefore, when initiating trades, you will always be long one currency and short the other currency. Wow, this is a mouthful!
To keep it simple though, at all times you are trading the exchange rate of these currency pairs, going long expecting the exchange rate to increase vs. going short expecting the exchange rate to fall. Should the exchange rate of EURUSD be 1.20, if you go long then price should go higher than the entry price, if you go short then price should go lower than the entry price.
Traders can enter long and short positions using market orders (instant execution) or pending orders (future execution).
And that is it, see, long and short are not all that complicated. Going forward, you do not have to worry about expressing your positioning to other traders.
See you next time.