Understanding what it means to take a long or a short position in the Forex market represents essential knowledge and something that every trader should know. Simply put, traders go long when they believe the asset will increase in price or go short if they think the price will depreciate.
What is a Position in Forex Trading?
A Forex position, which can be either long or short, represents the amount of an asset which is held by a certain party who has exposure to the price movements of the currency against a basket of other currencies. Each Forex position is defined by its underlying currency pair, its long or short direction and size.
Investors can trade a number of different currencies in the market and based on how they believe the currency will behave they take long or short positions. The size of the position traders take depends on their account size and margin requirements. Also, when making their move, traders need to make sure they’re using a proper amount of leverage.
What does it Mean to Have a Long or Short Position in Forex?
When going long, the trader will have a positive investment balance in a pair, hoping that the pair’s price will move up. On the other hand, going short involves a negative investment balance and the trader hopes that the pair will drop in price so that they can repurchase it later at a cheaper price.
Going Long
For instance, if a trader decides to place a buy order, he/she will take a long position in the currency pair, let’s say EUR/USD. In this particular case, the trader is hoping that the EUR will rise against the greenback.
As for the size of the order, the trader chooses it according to their account equity, for example, three lots of EUR/USD. Traders utilize various technical indicators to identify buy and sell signals and make their move. They search for buy signals to take a long position or sell signals to go short.
Going Short
Going short is the exact opposite of taking a long position. Like you already know by now, traders take a short position if they believe the price of an asset is going to slip. Traders take a short position in a bid to buy it back later in future at a lower price. Profit is reflected in the difference between the higher selling price and the lower purchase price.
For instance, if you decide to take a short position in EUR/USD, you’re selling the euro and buying dollar. One of the common examples of a sell signal is when the price of the underlying asset touches the resistance level or brakes below support.
In conclusion, knowing about long and short positions in Forex and their basic characteristics represents the essential knowledge of Forex trading. Traders take a long position if they believe the underlying asset will rise in price or a short position if they think the underlying asset’s price will depreciate. Every Forex position is established by its underlying asset, the direction, which can be long or short and its size.
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