Short and Long Trades in Forex
In this article
Beginner forex traders need to learn the fundamentals of long and short trades. This learning will play a role in getting maximum profit. “Go Long” and “Go Short” are two terms used interchangeably in the forex market. Therefore, you need to understand the fundamentals of short and long trades in Forex.
As in any trading market, long trade in foreign exchange (FX) implies that you buy with the expectation that your investment will increase. In contrast, short trade implies that you buy with the expectation that the price will fall.
What does it indicate to have long or short trades in the Forex market?
If you’re relying on a currency pair to rise or fall in value, you’re taking a long or short position. Going long or short is the simplest and most fundamental part of trading. A trader must have a positive investment balance to profit from an asset’s potential rise in value.
They will have a negative investment balance to see the asset depreciate so that it may be repurchased at a reduced price in the future when short.
Meanwhile, various currency pairs use to trade. They could go longer if they believe the currency’s value will rise. Their account equity and margin requirements would dictate the size of the position they would take. Leverage is an essential consideration for traders.
When you trade in a currency pair, one currency undergoes long trade while the second currency undergoes short trade, showing an inverse relation. So both are going side by side in forex currency pair trade.
This article will help you understand the concept of long and short trade and help to bring more profit to your trade. Different terminology is used in forex trading related to long and short trades, explained below.
Types of Positions
Any investor who invests their money in Forex wants to get more commission or profit. Therefore, the position of a trader in the market is critical. Long and short positions are the two kinds of asset trading positions available to investors.
Going long or short is an investor’s choice. Unfortunately, the call and put options complicate long and short positions.
When investors take a long (buy) position, they hope the price increases. In the event of a price increase, long-term investors will benefit. For the most part, stock purchases are long-term investments in the forex market.
It’s a long-call position when an investor buys a call option in the forex market. As a result, a boost in the asset’s price may profit a long call just as much.
Fundamentals of long trading
A “put option” must be purchased to initiate a long position in the market. The “long” portion of the put is calculated similarly to the long call. In situations where the underlying asset’s value falls, the value of a put option rises. Long puts an increase in value when the underlying asset’s value decreases.
If the security’s value declines, the investor can profit financially from the investment. However, executing or launching a short position is more complicated than acquiring an asset. When someone takes a short position in a stock, they hope the stock price will decrease.
For example, X currency is bought from a stockbroker and sold at the current market price. The investor now holds an open position in X currency with the broker, which must be closed at some point.
If the stock price declines, the investor may purchase X number of stock shares at a lower price than they paid previously. After paying all their expenses, the profit that remains is the investor’s profit.
Fundamentals of short trading
Many investors struggle to grasp the concept of short selling, even though the technique is quite simple. Consider the following illustration to see if we can shed some light on the situation.
Stock “A” presently trades at $50 per coin. You believe that the stock price will decrease for one reason or another, and you will take advantage of this by selling short.
Accredited investors are the only ones granted short stock positions since lending shares to execute a short sale necessitates a high level of confidence between the investor and broker. It’s infrequent for investors to make a margin or collateral deposit to short a stock.
Long and short entry
When someone enters the forex market by buying a currency, it is known as a “long entry.” When you enter the forex market by selling a currency, it is known as a “short-term entry.”
Long and short entries are the same terms used for long and short trading. Long entry leads toward long trade, and short entry leads toward short trade. In the forex market, both entries are working at the same time.
On the other hand, if someone is doing a long entry, someone is also doing a short entry. So the exact process occurs for long and short trades.
When should you trade a long-term position?
A trader who has executed a long position is betting that the underlying currency will rise. Therefore, when traders place a buy order, they take a long-term position in the market.
“Long” literally implies “purchase.” The term “long position” refers to the fact that you have purchased a currency pair. We are looking for the market to increase beyond when we entered long positions in a long trade.
Long trades look to make prices increase. It is also called “bull stock.” So you now understand how the price of a currency pair works.
Technical and fundamental reasons, why do traders hold on to their positions?
A focus on recent economic data is a crucial component of fundamental analysis. A currency’s value might increase if news releases exceed or surprise economists’ forecasts. Because of this, it may be a good idea to purchase or hold on to the currency.
The value of a country’s currency usually rises when its central bank says it will tighten monetary policy. As a result, forex traders may choose to go long on a currency pair, which usually means the country’s currency rises in value.
The technical base of a long position
One of the most common technical grounds for going long is a currency’s price breaking through a price level of resistance or a sale price.
A new market imbalance may be developing, which might lead to a dramatic change in the currency’s price mobility. It is also common for traders to go long when the currency price reaches a well-defined support level. Going long on a trading position and hoping to hold it until it ends is a common strategy for trend-followers.
When should you take a short position?
The total opposite of a long position is a short position. Traders anticipate a decline in the underlying currency’s value when they take a short position (go down). It is possible to “short” currencies, which is to sell a currency to rebuy it later at a lower price after its value has fallen.
A profit comes from the difference between its selling cost and its cost of repurchasing.
To initiate short positions, traders search for signs that indicate that the market is going down. This is a typical sell signal when the underlying currency price exceeds a certain degree of resistance.
It’s difficult to break through a price level regarded as resistance. USD/JPY rises to, e.g., 100 dollars but cannot rise any higher level. After passing 100 dollars, this level turns into resistance and provides traders with a sell signal.
The ultimate goal of short trading
To make money, you have to make short trades, to put it another way. A “short position” refers to that you’ve sold a currency pair in currency trading. The goal of a short sale is for the marketplace to fall just below the level we entered the deal.
Short trades look to make trades decrease. This is also called “bear stock.” Sell any coin at a high price and repurchase it at a lower price. For example, you sell a coin for 6000 dollars and repurchase it for 5000 dollars.
“Short and long” trades can define as “long” if the value of something rises relative to other assets and “short” if its value falls relative to other assets.
Price movement in long/short trading
By looking at the price movement of an item on a chart, you can see the difference between long and short investments. If you want the price to go up, you’re out. You’re short if you want the price dip on the displayed chart.
“Long” and “short” trades are both ways to make trades in Forex. You are always long one currency & short another when you make long or short deals. For example, if you purchase or go long on EUR/USD, you purchase EUR with USD, obtaining more EUR. As a result, you have a long EUR position and a short USD position.
Assume you sell or enter a short position on EUR/USD. Then you have a long USD position and a short EUR position.
In Forex, there are no actual “long” or “short” trades. So if you’re going to make long or short trades in the Forex market, the only thing that matters is how much interest you can pay or gain from the “Forex Broker”.
At least, in theory, this is based on the interest rates that banks charge each other when they lend currencies to each other. Some Forex brokers can make extra money from their clients by charging for overnight Forex swaps on both the long and short sides of the same trade.
The bull and the bear
The term “bullish” refers to describing a bullish market. A market trend is positive when it transforms the market from a downtrend to an uptrend. Conversely, “bearish” describes a market’s downward trend, analogous to a bear pushing its weight down from top to bottom.
When you take a short position, you sell your currency and then repurchase them when the market conditions improve. We enter the market with a long position and then sell them when we want to exit.
There could be no vacancies. Because you entered the market by selling your shares, you must transfer your shares to the person who purchased them to continue the position.
You have two trading options: you may either establish a buy or sell position on the currency pair. For example, if you believe EUR will rise in value versus USD, the price you are seeing quoted will rise—you would buy the EUR/USD currency pair or “go long.”
You’re purchasing Euros and exchanging dollars here. As a result, you are now bullish on the EUR and bearish on the USD. In short, buy any coin at a low price and sell it at a high price.
What is a stop-loss order?
Stop-loss orders are orders that are placed with a broker when a stock reaches a specific price. This minimises your trading risk, so you won’t lose too much money. The precautions you take will also prevent you from constantly monitoring the stock’s performance.
Can you short cryptocurrency?
It is possible to short cryptocurrency in several ways. For instance, you can use a margin trading platform for cryptocurrency. There is also a cryptocurrency futures market in which you can short cryptocurrency. You can short Bitcoin futures, for example, at the Chicago Mercantile Exchange.
There are two types of trading: long and short. Extended trading is when the price goes up, and short trading is when the price goes down. In every foreign exchange trade, you buy and sell a currency simultaneously. There is no real difference between buying and selling one currency and another.
When you trade commodities or stocks, long and short transactions are very different. These markets react very differently when falling and rising, with dips occurring more quickly and with greater volatility than rising.
In short trades with these assets, overnight swap rates are almost always much higher than in the long run.
To go long on a currency, you usually need to see it break through a certain resistance level or high-end price. Then, a new imbalance in the market could happen, leading to a significant change in the currency’s price. Many traders will buy when the value of a currency falls to a certain level of support.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst