What does going long and short mean?
* Trading is risky. Your capital is at risk.
Going long and short explained
When trading in the financial markets, people buy and sell assets such as currencies, commodities and stocks by “going long” or “going short” on them. Going long is a popular industry term used to describe the act of buying. On the flipside, going short is a term investors and traders use to describe the act of selling. Traders will go long when they expect that the price of the asset will rise. Alternatively, they go short when they expect that the price will fall. This is because in forex, as well as all other markets and businesses, traders make their profits when they buy low and sell high.
So, for example, if someone goes short on the EURUSD, they are expecting the price of the EUR to fall so that they buy it at a lower price and make a profit. Losses are incurred in the event of buying low and selling even lower, or selling high and buying even higher. Whether traders buy or sell first doesn’t matter, profits and losses can be made in any order.
How does long and short trading work in forex?
Because a forex trade is based on a currency pair, you’re simultaneously going long on one currency and short on the other.
For example:
- In the currency pair USDJPY = 100.00, the US dollar is the Base Currency and the Japanese yen is the Quote Currency.
- The forex quote shows a rate of $1 to 100 yen.
- You think the dollar will be worth more than 100 yen in the future so you buy, or ‘long’, the dollar and ‘short’ the yen.
- In effect, you’re selling the yen, just like shorting a stock by selling shares.
Going long means you’re speculating that the base currency will strengthen against the quote currency. And going short means you’re speculating that the base currency will weaken against the quote currency.
How long can I hold a long or short position in forex?
In the forex market, you can hold a position for anything from a few minutes to many years. It will depend on your trading style, your appetite for risk, and how the market is behaving.
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Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.