In forex trading, it is essential for all beginner traders to understand the basics of taking long or short positions. A long position is taken when a trader believes that a currency will increase in value compared to another currency, while a short position is taken when a trader believes that a currency will decrease in value compared to another currency. In other words, if a trader expects a currency to rise in value, they will "Go Long" on that currency, and if they expect it to fall in value, they will "Go Short" on that currency. Continue reading to learn more about when to use long and short positions in forex trading.
WHAT IS A POSITION IN FOREX TRADING?
In forex trading, a position refers to the ownership of a certain amount of currency by an individual or entity, which exposes them to the fluctuations of that currency against other currencies. Positions can be either long or short, depending on whether the trader expects the currency to appreciate or depreciate in value. A forex position has three main characteristics:
- the currency pair being traded
- the direction of the trade (long or short)
- the size of the position
Traders can take positions in various currency pairs and the size of their position will depend on their account equity and margin requirements. It is important for traders to use an appropriate level of leverage when taking positions.
WHAT DOES IT MEAN TO EXPECT A CURRENCY PAIR TO GO UP AND DOWN IN FOREX?
In forex trading, taking a long or short position means speculating on whether a currency pair will rise or fall in value. This is the most fundamental aspect of participating in the markets. When a trader takes a long position, they have a positive investment balance in an asset and hope that its value will increase. On the other hand, when a trader takes a short position, they have a negative investment balance and hope that the asset's value will decrease so that it can be repurchased at a lower price in the future.
A long position in forex trading is when a trader buys an underlying instrument with the expectation that its value will increase. For instance, if a trader buys USD/JPY, they have taken a long position in that currency pair, expecting the US Dollar to appreciate against the Japanese Yen.
For example, if a trader buys two lots of USD/JPY, they have a long position of two lots in that currency pair. The underlying instrument is USD/JPY, the direction of the trade is long, and the size of the position is two lots.
You can learn more about forex quotes by reading our guide on how to read currency pairs.
Traders use various indicators to look for buy signals to enter long positions. One such signal could be when a currency reaches a level of support. In the chart below, USD/JPY falls to 110.274 but is supported at that level multiple times. This level becomes a support level and provides traders with a buy signal when the price dips to that level.
One of the benefits of the forex market is that it operates almost 24 hours a day, 5 days a week. Some traders prefer to trade during major trading sessions, such as the New York, London, Sydney, and Tokyo sessions, because there is more liquidity during these times.
HOW DO YOU DESCRIBE A SHORT POSITION AND WHEN IS IT A GOOD STRATEGY TO TRADE IT?
A short position in forex trading is the opposite of a long position. When a trader takes a short position, they expect the value of the underlying currency to decrease. To do this, they sell the underlying currency with the hope of buying it back at a lower price in the future. The profit is made from the difference between the higher selling price and the lower buying price. For example, if a trader shorts USD/JPY, they are selling USD to buy JPY.
Traders use various indicators to look for sell signals to enter short positions. One such signal could be when a currency reaches a level of resistance. In the chart below, USD/JPY rises to 114.486 but struggles to rise further. This level becomes a resistance level and provides traders with a sell signal when the price reaches 114.486.
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