What Does Going Long or Short in Forex Mean?
The ability to go long or short is one of the interesting features the forex market has to offer because you can profit regardless of whether the market is moving up or down.
In this lesson, we’re going to cover what ‘long or short’ means.
Going long in foreign exchange trading (forex), as in all market trading, is buying with the anticipation of a gain in value. Going long is the inverse of going short, which is when you predict the price to drop. The purchase you are making in forex is a currency, and you earn when the value rises and when the value decreases.
Simple enough, right?
- Going long in forex trading involves buying with the anticipation that your investment will increase in value.
- When you go long on a currency, you’re betting that the base currency will outperform the quote currency.
- Traders go long in forex for a variety of reasons, including economic news and currency prices bursting through a price ceiling.
What Traders Should Be Aware Of
You buy or sell a currency pair while trading foreign currency. There is a base currency and a quote currency in every currency pair. This is how the duo generally looks: USD/JPY = 100.00. The base currency is the US dollar, and the quote currency is the Japanese yen. In this example, $1 is equal to 100 yen.
Because every currency trade involves two currencies, you will always go long on one and short on the other when you make a trade. When you go long on a currency, you’re wagering that the base currency will gain value against the quote currency. In the case above, you are wagering on the dollar, because you predict that its value would exceed 100 yen.
In a long trade on this currency pair, you will buy (or go long on) the dollar while simultaneously selling (or going short on) the yen. You’re shorting the yen by selling the currency pair, just as when you short a stock.
To use the stock market as an example: When you buy Apple (NASDAQ: AAPL) stock, you are going long in Apple stock and short in the dollar because you believe the dollar’s value will not expand as quickly as the value of Apple stock.
This connection can also be expressed as APPL/USD. You may also think of selling your stock back as going long in the US dollar and short on the stock, because, for whatever reason, you suddenly believe that having cash in dollars is more valuable than holding the stock.
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As you’ve been enlightened on the concepts of long or short in forex trading with relatable examples.
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