When we talk about trading, we often use the expressions “long” and “short” positions. In this blog, we’re going to cover what ‘long or short’ positions mean.
WHAT DOES IT MEAN TO HAVE A LONG OR SHORT POSITION IN FOREX?
A forex position has three characteristics:
- The underlying currency pair
- The direction (long or short)
- The size
Traders can take positions in different currency pairs.
Having a long or short position in forex means betting on a currency pair to either go up or go down in value. Simply put, when a trader thinks a currency will appreciate they will “Go Long” the underlying currency, and when the trader expects the currency to depreciate they will “Go Short” the underlying currency.
When a trader goes long, he or she will have a positive investment balance in an asset, with the hope the asset will appreciate. When short, he or she will have a negative investment balance, with the hope the asset will depreciate so it can be bought back at a lower price in the future.
What Is a Long Position?
A long position—also known as simply “long”—is the buying of a stock, commodity, or currency with the expectation that it will rise in value. Holding a long position is a bullish view.
When you go long, your profit potential is unlimited since the price of the asset can rise indefinitely. Day traders work to keep risk and profits under tight control, typically exacting profits from multiple small moves to avoid large price drops.
What Is a Short Position?
A short, or a short position, is created when a trader sells security first with the intention of repurchasing it or covering it later at a lower price. A trader may decide to short security when she believes that the price of that security is likely to decrease in the near future.
When creating a short position, one must understand that the trader has a finite potential to earn a profit and infinite potential for losses. That is because the potential for a profit is limited to the stock’s distance to zero. However, a stock could potentially rise for years, making a series of higher highs. One of the most dangerous aspects of being short is the potential for a short-squeeze.
A short-squeeze is when a heavily shorted stock suddenly begins to increase in price as traders that are short begin to cover the stock.
ENHANCE YOUR FOREX TRADING
- If you’re new to forex trading, download our Forex for Beginners Trading guide.
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