The Key Differences in Long vs Short Positions in Forex Trading￼
To trade the forex market, you can open a ‘long’ or ‘short’ position. Keep reading to understand what these positions mean and when to apply them in Forex Trading.
Long and short positions are two types of trades that can be executed in foreign exchange trading. They are opened as a result of a trader’s speculation about the most likely direction of price. In forex trading, traders are permitted to go long or short, and this is in contrast to some other forms of trading. These positions are great because they allow traders to profit from any market direction (uptrend or downtrend).
Another way to understand the difference between long and short trades is that if you make a trade where you want the price to rise in a chart, you are long on that currency or asset. If you want the price to fall in a chart, you are short on that currency.
What Is a Long Position in Forex Trading?
Long positions are also known as ‘buy’ trades. If traders expect the price of the currency to appreciate, they could go long by buying that currency.
For instance, if you expect the value of the US dollar to appreciate, you can buy a currency pair like USD/CAD. The base currency is the US dollar, while the quote currency is the Canadian dollar. Buying USD/CAD means you’re buying the US dollar and selling the Canadian dollar simultaneously. This is a long position that can be executed on forex brokerage platforms with ease.
Forex brokers allow contracts to be opened in ‘lots.’ For example, a trader who has bought two lots of USD/CHF has a long position of two lots in USD/CHF. The currency pair is the USD/CHF, the direction is long, and the size is two lots. Buying a currency pair means that you expect the base currency to gain strength while the quote currency declines.
What Is a Short Position in Forex Trading?
Short positions are also known as ‘sell’ trades. They’re executed when a trader expects the value of a currency to decline. If you’re trading on a brokerage platform, you would be able to trade several currencies in pairs. If you’re trading a pair like USD/JPY, then a short position means that you are selling USD to buy JPY. Hence, you have reasons to believe that the value of the US dollar will decrease while that of the Japanese yen will increase in the future.
You can open a sell trade at a high price and keep that position open as the price declines. You can decide to buy back at a lower price or exit the short trade in profit.
Both short and long trades require trade management strategies like stop loss and take profit.
The stop loss for a short trade is usually above the trade’s opening price, while the take profit is placed at a lower price.
The stop loss for a long trade is usually below the trade’s opening price, while the take profit is placed at a higher price.
1. Technical Indicators
The results of your technical analysis can influence your decision to go long or short. This can be done through trading theories like support and resistance or chart patterns.
Support occurs when falling prices stop, change direction, and begin to rise. Support is often viewed as a “floor” that is supporting or holding up prices. Most traders buy or go long at support levels.
Resistance is a price level where rising prices stop, change direction, and begin to fall. Buyers come in at resistance levels and take the prices lower. Most traders sell at resistance levels.
2. Fundamental Analysis
The goal of fundamental analysis is to understand the likely direction of price movement from a fundamental perspective. Getting micro and macroeconomic reports can guide your trades and technical analysis. This can be done by comparing news data and economic parameters like inflation and interest rates.
3. Inter market Analysis
Inter market analysis is a great way to step up your trading game. It compares different currencies and asset classes with a positive or negative correlation. The goal is to understand the likely direction of the assets and ensure that they are moving in tandem.
For instance, comparing the strength of the CAD with oil prices helps to get a holistic view of the two assets since the CAD is correlated with oil.