Traders come into Forex with the goal, just like in other markets, to make profits. There are so many ways by which traders can make gains in the market but the most obvious one is going long or short.
A Forex position is the amount of a currency which is owned by an individual or organization who has the exposure to the movements of the currency against other characteristics and it can be characterized by:
- The underlying currency pair
- The Direction (Long or Short)
- The size
Before we continue, let’s take a refresher on currency pairs. In the stock markets, stocks and shares are traded but in Forex, currencies are traded and they occur in pairs. Some common examples of these are GBP/USD, EUR/USD amongst others. The first currency is referred to as the BASE CURRENCY while the second is called QUOTE CURRENCY. Look up How to read and understand Currency Pairs to better grasp the concept.
Long and Short Positions
Going long is simply you buying more of a currency pair if you expect the base currency to appreciate so you can make a profit while going short involves you selling more of a currency pair if you expect the base currency to depreciate
Now, since every trade on the market deals with currencies in a duo, when we go long on one currency, we are concurrently going short on the other currency. So when we buy a certain pair, it means we are making a trade on the expectation that the base currency will strengthen against the quote currency. This means we are simply buying the base currency and selling the quote currency.
Going “Long” in Forex
In Forex, this is investing in a currency pair with the hope that the base currency will appreciate over the quote currency so that they can be sold at a higher price than it was bought and the trader can make a profit. It is also the same as taking a long position in the market. This is expected when a trader speculates an upward movement in the base currency and conversely, he expects as well a downward movement in the quote currency.
There are so many factors that can encourage a trader to go “long” on a currency pair. Looking out for news and press releases about economic expectations of a country by residing economists would suggest that the economy of that country is strengthening and this will, in turn, cause the value of that nation’s currency to increase. At this point, a trader can consider going long. Take for example, a trader who has bought two lots of USD/JPY has a long position of two lots in USD/JPY. The underlying is the USD/JPY, the direction is long, and the size is two lots.
Also, the use of indicators can help a trader to determine when to go long as well, knowing the well-defined support level of a currency. These support levels are zones and not concrete numbers and they are usually values where a currency reaches before embarking on an uptrend after a while.
For instance, an example of a buy signal is when a currency falls to a level of support. In the chart below USD/JPY depreciates to 110.274 but is supported at that level multiple times. This level of 110.274 becomes a support level and offers traders a buy-signal for when the price dips to that level.
Going “Short” in Forex
This is simply the opposite of going long. It can also refer to taking a short position. A trader goes short or enters a short position when he expects the price of a currency to be bearish (depreciate or go down). When you short a currency, it means you are selling the currency at the price it is with the expectation that it will depreciate or go down so that it can be purchased at a lower price later on.
The profit will arise from the difference between the high selling price and the lower buying price. For example, consider the currency pair EUR/USD. If you go short on the pair, it means you are selling EUR to buy USD. Traders keep an eye out for sell signals to help them know when they should enter a short position. Economic policies as well as political events can affect the economy of a country that may cause its currency to weaken in comparison with other nations. This can cause a trader to short such currency.
A sell signal that most traders use is that of the resistance level. Like its counterpart, the resistance level is a range of prices where a currency has struggled to push above. In the chart below USD/JPY appreciates to 114.486 and struggles to appreciate further. This level becomes a resistance level and offers traders a sell-signal when the price reaches 114.486.