To succeed at anything in life, you must know its basics, and the same holds true for trading. When in the market, you make a move by holding a particular position, and your position plays a vital role in whether or not you will ace your trade. You often would have thought, “What is a long and short position in trading?” “Should I be going long or short” and “Which strategy will better align with my trading goals?” If you are perplexed by such thoughts and want their answers, then you are at the right place.
Here we will start from the basics of holding a position in trading and will move towards what is a long and short position in trading as well as its importance in understanding how the market works, with each step being explained thoroughly and professionally.
So without much ado, let’s dive in deep and start our journey from the basics; what is a position in forex trading?
What is a position in Forex trading?
Forex trading is becoming more popular than ever before. An individual or business that owns a certain quantity of a currency and is exposed to that currency’s swings versus other currencies is said to be in a forex position. It is a trade that has been entered into to profit from a currency’s price movement. People can take two main types of positions in this market: long and short. Your position determines how you profit from a currency’s price movement.
Characteristics of a Forex Position
Forex is a global market where traders buy and sell different currencies. It is the largest and most liquid financial market in the world. A forex position constitutes three main things, the particular currency pair you are trading, whether you are opting for a long position or short, and the size of your trade.
In a trade, holding a long position means that the trader has bought the currency with the hope that it will increase in value. On the other hand, holding a short position means that the trader has sold the currency with the hope that it will go down in value. Moreover, the size of the trade refers to how much of that particular currency will be bought or sold; thus, it depends on how much you’re willing to risk on your particular trade.
What is meant by taking a position in Forex trading?
An individual or business that owns a certain quantity of a currency and is exposed to that currency’s swings versus other currencies is said to be in a forex position. It is a trade that has been entered into to profit from a currency’s price movement. People can take two main types of positions in this market: long and short. Your position determines how you profit from a currency’s price movement.
A short position is when a trader sells an asset and then buys it again to make a profit when the price falls. Conversely, a long position is when a trader buys an asset to make a profit when the price rises.
To take a position in trading, traders must have the knowledge and experience to make informed decisions about their investments. They also need to be able to analyze market trends and make predictions about future prices. These skills are what separate traders from traders. A trader’s job is challenging as it requires an understanding of how markets work. It also requires someone who can constantly adapt their strategies as markets change over time.
So what it means to a trader to take a position is that they will hold a particular stance as to whether the market will be bullish, bearish, or neutral.
Now that we have understood the basics of how holding a position works in Forex, let’s move toward our main topic, What is a long and short position in trading?
What is a Long and Short Position in Trading?
Going long means buying an asset with the intent of making more money from it in the future as you expect that the value of that asset will increase, while going short means selling a particular asset for a high price before the market dips and then repurchasing it at a lower price to make profits. It is worth mentioning that when a trader holds a long position, generally, it means that he has bought that particular asset. On the other hand, a trader holding the short position generally has not owned the asset yet and is often borrowing it from someone. Now, let’s discuss the two of them in detail.
Long position
A long position is when a trader buys an asset to make a profit when the price rises. A long position is profitable if the price of the underlying asset increases. So, by purchasing a financial asset, a trader initiates a long position. Now, that particular asset can then be sold for a profit if its value rises, but on the other hand, you can also face losses if its value drops.
Short Position
A short position is when a trader sells an asset at its peak value and then buys it again when the price falls to make a profit. Traders that take a short position anticipate that the underlying asset’s value will decrease. Thus, selling the underlying currency in the expectation that its value will decline in the future will allow the trader to repurchase it at a later time for a lower price and result in gaining some profit. This strategy is known as shorting a currency.
You can read how long it takes to learn Forex trading here.
What is a Long Position and When to Trade it?
A long position in Forex is when you buy a currency that you expect to increase in value. A long position is typically used when a trader feels that there will be upward movement in the price of a given currency in the future. Now, going long means that you are buying the base currency while selling the quote currency of the currency pair.
Let’s take an example to understand this whole thing. For instance, you hold a long position of 5 lots for the EUR/USD currency pair. It means that you are buying Euro against the US dollar and expecting the Euro’s value to increase in the near future. Thus, you will gain profits when the value of the Euro increases. In this example, EUR/USD is your currency pair of choice, 5 lots are the size of the trade, and your position is long.
It is worth mentioning that the best time to trade a long position is when you believe that the market will rise, which is typically done when there is an uptrend. Moreover, it will help if you look for the buying signals and the market indicators, like when the value of the particular currency you want to trade falls to the support level and MACD, etc., to enter the trade at the right time to make the most out of it.
What is a Short Position and When to Trade it?
A short position is typically used when a trader feels that there will be a downward movement in the price of a given currency in the future, so what he does is sell that currency for a good price. Once the market dips and its price decreases further, buy it for a smaller price. Thus, he gets the same assets that he sold at a higher price now at a lower price, resulting in gaining profits. Now, going short means, you are selling the base currency against the quote currency of the currency pair.
Let’s revisit our previous example to understand this whole thing. For instance, you hold a short position of 5 lots for the EUR/USD currency pair. It means that you are selling Euros against the US dollar (you are buying the US dollar) and expect the value of Euros to decrease soon. Afterward, you can buy the same currency at a lower value when the market takes a dip. Thus, now you get the same currency that you sold at a higher price previously at a lower price, resulting in gaining profits. In this example, EUR/USD is your currency pair of choice, 5 lots are the size of the trade, and your position is short.
It is worth mentioning that the best time to trade a short position is when you believe that the market will fall and is typically done when there is a downtrend in the market. Moreover, it will be best to look for the selling signals and the market indicators, like when the value of the particular currency you want to trade reaches the resistance level and MACD, etc., to exit the trade at the right time to make the most out of it.
What are Trading Indicators?
Both professional and amateur traders can use trading indicators. They are a way for traders to predict the future movement of a currency pair in the market. They provide traders with a snapshot of the market and help them decide whether to enter or exit a trade. It is not just about seeing the market at one point in time but also considering other factors such as a trend, momentum, and volatility. Trading indicators are used by many different types of traders, from day traders to long-term traders who practice positional or buy-and-hold trading.
Trading indicators are classified into three types: price action, volume, and momentum indicators.
- Price action indicators indicate the initiation of a trend in the Forex market. These include support and resistance, price bars, trends, etc.
- Volume indicators detect whether a trend is going up or down by looking at the volume of an asset or market over time, like the Positive and Negative Volume Index (PVI and NVI), On Balance Volume (OBV), etc.
- Momentum indicators analyze the speed with which an asset’s price is moving to predict future price movements. They include MACD (Moving Average Convergence Divergence) and RSI (Relative Strength Indicator).
RSI
The Relative Strength Index (RSI) is a technical indicator that measures the magnitude and speed of price movements. The speed and changes in price movement are affected by two factors – the trend and the volatility. The trend indicates whether prices are increasing or decreasing while volatility indicates how much price fluctuates.
RSI has many uses in forex trading, such as predicting changes in momentum or trend direction. If the RSI value is above 70, it means that the particular currency pair is overvalued or overbought. Being overvalued means the particular currency has been traded at a higher value than its true value. So what happens is that that trader expects that to correct the price, there will be strong chances that the market will move towards pullback, and there will be a bearish trend.
On the other hand, if the RSI value is 30 or below, it means that the particular currency is undervalued or oversold. Being undervalued means that the particular currency has been traded at a lower value than its true value. So, what happens is that the trader expects that in order to correct the price, there will be strong chances that the market will move towards retracement and there will be a bullish trend, and in such hopes, they buy that currency.
It is worth mentioning that generally, during an uptrend in the market, the RSI value remains higher than 30 and can even reach higher than 70. On the other hand, if there is a downtrend, the value frequently becomes 30 or lower.
Moving Averages (50, 100, 200 SMA)
Moving averages are the lagging indicators (as they change after the actual change in the price of an asset in the market) that help traders determine when to enter or exit a position.
Support and Resistance
One of the popular trading indicators involves support and resistance. They help them to predict the price direction of an asset. Support and resistance levels signal a price trend and are used in many ways, such as identifying trade entry points or determining the best time to open or close a position.
The support level is the price point below which a currency pair won’t fall, while the resistance is the price point beyond which the currency pair is unlikely to rise.
You can figure out the support and resistance levels by looking at the technical indicators, considering the previous points of support and resistance levels, looking through the peaks and troughs, and analyzing the historical price data.
MACD
The Moving Average Convergence Divergence (MACD) is one of the most popular indicators in trading. The MACD indicator is a trend oscillator used to determine trend direction and whether a trend has started or ended.
Traders use the MACD indicator to identify the strength of a trend. When the MACD line crosses above the zero line, it indicates that a new uptrend has begun, and it is better to enter the trade and buy the assets. When it crosses below zero, it signals that a downtrend has begun, and it is better to exit the trade and sell the assets.
Factors affecting Long and Short Positions
Technical analysis
Using past market data and indicators like the volume and price of assets and the relative strength to predict where prices will go in the future.
Fundamental analysis
Analyzing the company’s financial statements, researching how its industry is doing, and the current market situation to predict future price movement.
Tecno fundamental analysis
The decision-making process for a techno-fundamental analysis combines the technical and fundamental analyses that investors can use to identify potential investments and traders to make informed decisions on trading strategies.
Macroeconomics
Using news from macroeconomic indicators such as GDP, unemployment, interest rates, and inflation to predict the future price movement of a given asset or index.
What is a Flat Position in Trading?
Apart from the basic trading positions, long and short, there is another term that you will come across when in the market, and that is flat or square position. The flat position is also known as the square position because it creates no profit or loss as either there is no trade made at all (because the trader thinks there is a lack of opportunities in the market) or the effects of trade (long and short positions) nullify each other completely.
Conclusion
This article regarding the positions that you as a trader can hold in the Forex trade has concluded, and we have answered what is a long and short position in trading, how it works, and its importance. We hope that by the end of this article, you have understood the meaning of going long and short in Forex, with each representing the opposite sides of a trade, as in going long, you are buying a currency, while in going short, you are selling a currency. So next time, when making a trade, it will help if you consider these points.
Happy trading!
References
- A Forex trading expert system based on a new approach to the rule-base evidential reasoning
- Longer time frame concept for foreign exchange trading indicator using matrix correlation technique
- Forex for beginners
- What is forex trading?
FAQs
What is a long position in Forex trading?
A long position is when a trader buys a currency to make a profit when the price rises. Basically, you are buying the base currency against the quote currency. Thus, if you hold a long position for EUR/USD, you are buying Euro and selling the US dollar and will gain profit if the value of the Euro increases.
What is a short position in Forex trading?
A short position is when a trader sells a currency at its peak value and then buys it again when the price falls to make a profit. You are selling the base currency against the quote currency. Thus, if you hold a short position for EUR/USD, you sell euros and buy the US dollar.
What does it mean to go long and short in trading?
Going long means buying a currency with the intent of making more money from it in the future as you expect that the value of the currency will increase while going short means selling a particular currency for a high price before the market dips and then repurchasing it at a lower price to make profits.
How long can I hold a Forex position?
There is no limit to how long you can hold a Forex position, as you can hold your position for mere minutes or even years, depending upon your particular trading strategy.
How do short positions make money?
A short position is typically used when a trader feels that there will be a downward movement in the price of a given currency in the future, so he sells that currency for a good price. Once the market dips and its price decreases further, he buys it for a smaller price. Thus, the trader gets the same assets that he sold at a higher price now at a lower price, resulting in gaining profits.
