Forex is making the difference!
As aspiring traders are getting familiar with different terms used in this market, the next one in queue is long short forex. These are two positions in trade determined as per speculations of increase or decrease in currency value.
Fine! Let’s make it easier to understand.
Begin with understanding ‘long’ position:
During ‘long’ or long position, first currency of the currency pair is bought, expecting price to go higher and simultaneously the second of that pair is sold short. In terms of base currency, a long position is expressed.
Understanding ‘short’ position:
In a ‘short’ position, the reverse happens. While first currency of the pair is sold, the second one is bought. A trader sells his base currency as he expects its value to decline. This is termed as going short on a currency.
Long short forex:
In every position of forex trading, you need going short in one position while long in the other. And this happens simultaneously. A trader can then close his position after a profit has been gained.
Basically, long short in forex are the two methods of generating profit in this global financial market. For your easy remembering of these concepts, short is the sell position while long is buy position.
Here’s an example:
Don’t confuse with this short and long forex concept of currency pairs. Simply, the first one is your base currency and the second, your counter currency.
Take a pair USD/EUR– This clearly denotes that you have purchased Dollar while automatically selling Euro. Again, if you have purchased Euro and sold Dollar, that denotes you have bought EUR/USD.
Which long short forex position to enter?
It is important to enter in the right position while opening a trade. For that, you must be familiar with the technical analysis and market trends. Also, consider learning the various indicators affecting market direction. By following the right strategy, you can make a good profit if market goes in your for.
Closing of forex long or short positions:
To close long position:
- You need to sell an amount similar or equal to that existing currency pair that would bring down your long position to zero.
- Profit is earned when you would receive more on selling than what you had paid for purchasing that order.
- Loss is when this return is less.
Example – Suppose you have a forex long of $100,000 USD/EUR. Then an equal amount of $100,000 USD/EUR has to be sold back to the market so that your USD/EUR holdings get reduced to zero.
To close short position:
- This is just the opposite of long; you can say they are opposite sides of the same coin. In this case, the currency pair is holding a negative amount.
- As a wise trader, you have to purchase enough of your pair derivative for bringing back the position to zero.
- Profit comes when you can make this purchase at a less amount than what you earned after selling it in the beginning.
Example –Suppose you have a forex short of $100,000 USD/EUR. Then again a similar amount of $100,000 USD/EUR has to be bought for closing that short position.
This is what short and long forex is! I hope I could clear your doubts!
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.