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Long vs. Short Positions in Forex Trading

Long vs. Short Positions in Forex Trading

For all novice traders, it is essential to grasp the fundamentals of going long or short in forex. Whether a trader believes a currency will appreciate (go up) or depreciate (go down) in relation to another currency determines whether to take a long or short position. To put it simply, a trader will “go long” the underlying currency when they anticipate an increase in value and will “go short” the underlying currency when they anticipate a decrease in value.

Learn more about long and short positions in forex trading, including when to utilize them, by continuing to read.

What Is A Position In Forex Trading?

A forex position is the amount of a currency that a person or organization owns and exposes them to changes in the value of that currency in relation to other currencies. Either a short or long position is possible. Three qualities define a forex position:

  • The underlying pair of currencies
  • Which way to go (long or short)
  • The size

Traders are able to hold positions in many currency pairs. They could go long if they anticipate an increase in the value of the currency. Their account equity and margin requirements would determine the magnitude of the position they would take. It’s critical that traders employ the right level of leverage.

What Does A Long Or Short Position In Forex Mean?

In forex, a long or short position is a wager on the increase or decrease in the value of a certain currency pair. Engaging in the markets requires knowing whether to go long or short. A trader who goes long will have a positive investment balance in the asset in the hopes that it will increase in value. When they are short, they will have a negative investment balance in the hopes that the asset will lose value and be able to be purchased later on for less money.

When To Trade A Long Position And What Is It?

An accomplished trade in which the trader anticipates appreciation of the underlying instrument is known as a long position. When a trader executes a buy order, for instance, they are in a long position in the underlying instrument, such as the USD/JPY. In this case, they anticipate that the US dollar will increase in value relative to the Japanese yen.

For instance, a trader with a long position in USD/JPY makes two lots of purchases. The size is two lots, the direction is long, and the underlying currency is the USD/JPY.

To initiate long positions, traders search for purchase indications. Traders employ indicators to find buy and sell signals when they want to enter the market.

A currency falling to a support level might be an example of a purchase signal. The USD/JPY declines to 110.274 in the chart below, but it again finds support at that level. When the price drops to this level, 110.274 turns into a support level and provides traders with a buy signal.

One benefit of the foreign exchange market is its near-constant trading volume. Because there is more liquidity during the main trading sessions—such as those in New York, London, Sydney, and even Tokyo—some traders prefer to trade during these periods.

What is a Short position, and When should you trade in it?

In essence, a short position is the reverse of a long position. Traders anticipate that the value of the underlying currency will decrease when they open a short position. Selling the underlying currency with the expectation that its value will decline in the future enables a trader to later purchase the same currency at a reduced cost. This strategy is known as shorting a currency. Profit is the difference between the lower purchase price and the higher selling price. As a concrete illustration, a trader who shorts USD/JPY is selling USD in order to purchase JPY.

To initiate short positions, traders search for sell indications. When the price of the underlying currency approaches a level of resistance, this is a common sell signal. A price level that the underlying has had difficulty breaking above is referred to as a resistance level. The USD/JPY chart below shows an appreciation of 114.486 and a struggle to rise higher. When the price hits 114.486, this level turns into a resistance level and gives traders a sell signal.

While there are traders who only trade during the main trading sessions, traders can execute a trade almost anytime the forex market is open, if appropriate.

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