Are you interested in currency trading but don’t know where to start? Or maybe you have some experience but wish to up your game? The foundation of FX trading is to understand the long position, short position dichotomy.
And that is what this article will help you with – you will learn what taking the long or short position is, how these trading tactics can make you a profit, and the mechanics behind it. We will also explain the differences between forex trading and trading stocks, as these markets use the same terminology but are very different in practice.
From there, you can explore different trading tactics and apply your knowledge in practice. So, let’s get started with the basics.
Going long or taking a long position in trading means that you have a positive investment in the asset you are trading, expecting it to rise in relative value over time.
In other words, you are buying an asset (be it stocks, currency, commodities, etc.) because you believe it will appreciate, then selling at some point in the future to make a profit. The philosophy behind the long position is essentially ‘buy low, sell high’.
So, when you go long, you are buying an asset.
Going short or taking a short position in trading means that you have a negative investment in an asset, expecting it to decrease in value over time.
In other words, you are selling an asset because you believe it will depreciate, then buying the asset back in the future at a lower price. The philosophy behind the short position is ‘sell high, buy low’.
Thus, when you go short, you are selling an asset.
Understanding the long position, short position dichotomy is not that complex when it is put like this, is it? And the basics truly are that simple. However, forex trading has a few specific features that you will usually not encounter in other types of trading.
Namely, by its nature, forex trading is always done in currency pairs, i.e. you need to sell one currency to buy another. Let’s take USD/EUR as the underlying pair, with the USD being the base currency and EUR being the quote currency. For example,
If you are correct in your estimation that the USD will gain on the EUR, you stand to make a profit. If the EUR appreciates at a comparable rate to the USD, you gain nothing (and potentially have your investment tied up). If the USD depreciates against the EUR, you are losing money.
Thus, when you are trading currencies, you are simultaneously taking both a long and short position, the former on the base and the latter on the quote currency. Another specific of forex trading is that you own the asset you are using for the short position (i.e. the currency you are using to buy the currency you expect to appreciate).
Which assets you own will become important later, as that is one distinction between forex trading and stock trading. For now, this is the basis of the long position, short position game in forex trading.
In principle, yes. There are no complex mechanics that convolute the process. You buy a currency, hold it until it appreciates, and sell it for a profit. The forex market is open 24/7, so you can participate in trading at any point.
However, correctly estimating which currency will appreciate and which will depreciate is very difficult. This is why forex traders use extremely complicated analyses that factor in many metrics to predict market movements. And even then, trading currencies is a risky business.
There is one additional practical concern with trading currencies – liquidity. Popular currency pairs, like EUR/USD, USD/JPN, GBP/USD, or USD/CHF are always tradable, i.e. there are always buyers and sellers that are willing to trade.
On the other hand, if you wish to trade exotic currencies, like the Iraqi dinar, Vietnamese dong, Indonesian rupiah, etc., you may have difficulty finding traders that deal in them. So, if you use USD to buy IQD, and correctly estimate that the IQD will appreciate, you may not be able to sell while the price is high because the IQD doesn’t have enough buyers at that point in time.
Once again, this is not a concern with the more popular currencies, particularly with major currency pairs, but you need to be aware of liquidity if you plan to trade in exotic currencies.
If we are talking about the length of time that you can hold a position, there is no limit. You can go long on dollars and short on euros and hold the position indefinitely. How profitable that is would depend on how the market behaved.
While this article is not focused on stock trading, we should still cover the basics and the differences with forex trading. So, the principles behind trading stocks are the same – everyone is aiming to sell high, buy low, or buy low, sell high. The short and long stock positions are also similar:
However, the mechanics are different than forex trading, which makes the process different. In the forex market, you always own an asset. So, if you use USD to buy EUR, you owned USD (the old asset) and now own EUR (the new asset).
In stock trading, you only own an asset if you are taking a long position. Thus, you buy stocks and own them in the hope that they will appreciate and you can sell them for a profit.
When you take a short position, you borrow the asset/stock from a broker and sell it on the market. You hope that the stock will depreciate and you can buy them back, while making a profit off of the difference.
It is very important to note that because you are borrowing the assets when taking the short position, you also pay interest on the loan and probably a broker’s fee. So if the stock doesn’t depreciate, you are paying high interest rates while waiting for it to drop in value and losing money.
If you can’t wait for it to depreciate and sell while the value is still high, you lost money on the difference and the interest rates. If you had to wait a long time until the stocks depreciated, the difference could still be lower than the interest you paid, so you again lost money. Plus, your capital is tied up in the process. And that’s just the simplified version.
Consequently, taking the short position in stock trading is the riskiest proposition out of all the types of trading we discussed and should generally be left to professionals.
We’ve explained the difference between going long and going short in forex trading, so if you feel comfortable giving it a go, we can help you put it into practice. US First Exchange exchanges currencies at premium rates and delivers the bills right to your door.
We are one of the few places where you can freely exchange over 20 exotic currencies, including the Iraqi dinar, Vietnamese dong, Turkish lira, and Russian ruble, among others. If trading is on your mind, buy or sell currencies in 4 easy steps at US First Exchange.
Ready to sell? No more waiting. We provide everything you need to ship and receive funds for currencies you own.