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Understanding the basics of going long or short in forex is fundamental for all beginner traders. Taking a long or short position depends on whether a trader thinks a currency will appreciate (go up) or depreciate (go down), relative to another currency. 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.
Read on to find out more about long and short positions in forex trading and when to use them.
A Forex position is the amount of currency that is owned by an individual or entity, which then has exposure to the movements of the currency against other currencies. The position can be either short or long. A Forex position has three characteristics:
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Traders can take positions in different currency pairs. If they expect the price of the currency to appreciate, they could long. The size of the position they take would depend on their account equity and margin requirements. It is important that traders use the appropriate amount of leverage.
Features IG client sentiment for a full overview of what positions traders are taking in the forex market.
Having a long or short position in forex means betting on a currency pair to either increase or decrease in value. Going long or short is the most basic aspect of engaging with the markets. When a trader goes long, he or she will have a positive investment balance in an asset, with the hope that the asset will appreciate. When short, he or she will have a negative investment balance, with the hope that the asset will depreciate so that it can be bought back at a lower price in the future.
A long position is an executed trade where the trader waits for the underlying instrument to appreciate. For example, when a trader executes a buy order, they hold a long position in the underlying instrument they bought, ie. USD/JPY. Here they expect the US dollar to appreciate against the Japanese yen.
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For example, a trader who bought two lots of USD/JPY has a long position of two lots in USD/JPY. The underlying is the USD/JPY, the direction is long, and the size is two lots.
Traders look for buy signals to enter long positions. Indicators are used by traders to look for buy and sell signals to enter the market.
An example of a buy signal is when a currency falls to a support level. In the chart below USD/JPY depreciates to 110.274 but is supported at that level several times. This level of 110.274 becomes a support level and offers traders a buy signal for when the price drops to that level.
An advantage of the forex market is that it trades almost 24/5. Some traders prefer to trade during the main trading sessions such as the New York session, London and sometimes the Sydney and Tokyo session as there is more liquidity.
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Recommended by David Bradfield Get the basics right with our beginners guide to forex Get My Guide What is a short position and when to trade it?
A short position is essentially the opposite of a long position. When traders enter a short position, they expect the price of the underlying currency to depreciate (down). Shorting a currency means selling the underlying currency in the hope that its price will drop in the future, allowing the trader to buy the same currency back at a later date but at a lower price. The difference between the higher selling price and the lower buying price is profit. To provide a practical example, if a trader is shorting USD/JPY, they are selling USD to buy JPY.
Traders look for sell signals to enter short positions. A common sell signal is when the price of the underlying currency reaches a resistance level. A resistance level is a price level that the underlying has struggled to break above. In the chart below USD/JPY appreciates to 114.486 and struggles to appreciate further. This level becomes a resistance level and offers traders a sell signal when the price reaches 114.486.
Some traders prefer to trade only during the main trading sessions, although if an opportunity presents itself, traders can execute their trade almost whenever the forex market is open.
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If you are new to forex trading, we recommend downloading our free forex beginner’s guide, which walks you through the fundamental steps to get started. It is also important to understand the number one mistake traders make when trading forex.
When you start your trading journey, you can download our free currency forecasts covering the main FX pairs. These are compiled by our experts here who also host daily trading webinars and provide regular updates on the forex market.
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