Longs and Shorts

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Learn all about Longs and Shorts

Experienced forex traders will certainly be familiar with the concept of buying to initiate a trade. The basics of making a profit in anything is buying low and selling high!

Financial jargon plays a key role in markets. It gives familiarity for traders taking in a particular trading subject. This jargon is most important and common when traders discuss the ‘position' of a trade. longs and shorts are discussed all the time.

Traders who are buying with the prospect and foresight of closing at a higher price later, are said to be going ‘long' in that particular trade. The following graphic will illustrate the dynamic of a long position.

Here is a diagram which illustrates the dynamics of a ‘going long' position.

 

forex Longs and Shorts

 

While this may seem fairly straight forward, the next example may seem a little bit wierd to new traders.

The concept of selling something that is not already owned is may prove more confusing. However the more intellligent, experienced traders create a way of making it ‘the way to go'.

So when a trader is going ‘short' in a trade, they are actually selling with the aim of buying back to cover the trade at a lower price. The difference between the initial selling price, and the price at which the trade was ‘covered,’ is the traders profit to keep less any fees, commissions, or selling expenses.

The diagram here demonstrates a ‘short' position.

 

going short

 

I must stress the importance of the interesting distinction and similarity between currencies and other markets. As currencies are annotated with two sides, they first 3 letters quoting one currency and the latter three the other, each trade offers the trader both long and short exposure in varying currencies.

For instance, a trader going short EUR/GBP would be selling Euro’s and going long British Pounds. However, if the trader went long the currency pair they would be buying Euros and selling British Pounds.

Ok Last lesson before our 1st quiz, but an important one!

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