Long and Short in Forex - How does it work?

Updated May 08 2022

Long and Short in Forex - How does it work?

Going long means opening a trading position where you expect the price of an asset to increase in order to profit. Going short means opening a trading position where you expect the price of an asset to decrease in order to profit.

The forex market is a specific phenomenon. Although one could argue that owning currency is like being a shareholder in a certain nation, currencies don't trade like shares. They are always compared to other currencies, trading in ratios that fluctuate according to the macroeconomic changes.

Read on to learn more about forex and how it differs from other markets.

What is Forex?

The foreign exchange (forex) market is a global market for currency trading. It operates as a decentralized network of financial institutions around the globe, on a 24-hour basis opening with the Australian market on Monday and closing with the U.S. session on Friday.

Since currencies do not trade in absolute value, they are listed as ratios. For example, the most liquid currency pair, Euro vs. U.S dollar, is abbreviated as EUR/USD, with International Organization for Standardization (ISO) codes associated with the national currency.

The forex market rose to prominence in the 1970s, after the breakdown of the Bretton Woods fixed exchange system (gold standard). As currencies started floating, optimizing the currency exposure to facilitate foreign trade made the foreign exchange a necessity. Eventually, forex became the most significant financial market with daily volumes exceeding $7 trillion.

Retail forex trading became popular in the late 1990s, as the online forex brokers popularized high leverage, low-latency trading with a competitive cost structure due to high liquidity. Nowadays, some estimates show that retail traders account for over 5% of the daily forex market trading volume.

What is a long forex position?

Going long or buying is taking a stance that something will rise over a period of time. Since currencies trade as a ratio, buying means that you are betting that one currency will get stronger against another. In the short term, this can be just due to intraday fluctuations, but this will always be driven by macroeconomic factors like interest rates or GDP projections in the long term.

Example of a long forex position

Let’s say that you are expecting the U.S dollar (USD) to appreciate against the Swiss franc (CHF). The pair currently trades at 0.92. You go long USD/CHF, buying 1 lot, or 100,000 units. Now you have bought USD with CHF, expecting the value of CHF to go down so that the value of your position goes up.

In the next hour, USD/CHF appreciates to 0.92250 or 25 pips. Your profit ends up being 25 x 10.86 (USD/CHF value per pip) = $271.44

What is a short forex position?

Going short or selling is expecting that the value of something will decline over time. However, selling a currency means betting that another currency will rise against it.

If you are selling Euro (EUR) against the U.S dollar, you’re expecting the U.S dollar to gain in value against it.

Example of a short forex position

Consider the following example — EUR/USD is trading at 1.13, and you decide to go short and sell 1 lot (100,000 units). You're selling the euro and buying the US dollar, expecting its value to appreciate.

Eventually, the price drops to 1.12750 , and you decide to close your position, buying back the euro that you sold at a lower price. Your profit would be 25 x 10 (EUR/USD value per pip) = $250.

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How to make money in Forex?

Forex might be simple to learn, but it is hard to master. If you want to make money consistently, you will need to be patient and disciplined.

Here is the list of things to consider when pursuing forex trading

It is All About the Ratios

Although it might seem complex initially, going long or short on currencies is similar to any other market. You are speculating that the price will rise or fall in the future. Yet, currencies trade in ratios, so in this case, you are buying or selling the money itself.

Forex might be simple to understand, but it takes a long time to master. However, if you take the time to discover what suits you and implement the tips from this article, you will find yourself on the path to profitability.

Frequently Asked Questions

How do you trade in a short time?

Short timeframe trading involves following the price movement on a timeframe that is lower than 1 hour. Usually, it is on 5 or 15 -minutes charts. Some traders might even use 1-minute trades, despite the unavoidable market noise on those timeframes.

Short-term trading can be either with the long-term trend or against it, catching the counter-trend moves as price withdraws to the mean. There are numerous short-term trading strategies, but some of the most popular include Fibonacci retracement, moving averages, and Elliot Wave analysis.

How long is short term in forex?

Although there is no consensus, the short-term generally covers a period from a few minutes to as long as a few days. However, it is less than one week.

One advantage that forex has over stocks is that it has no pattern day trade rule that prevents traders with a capital lower than $25,000 to make 4 or more day trades over 5 business days using a margin account in the U.S.

Author

Stjepan Kalinic

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