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What are long and short positions in Forex?

What are long and short positions in Forex?

When trading on Forex, you can either sell or buy currencies, or, in other words, open short or long positions. In this article, we will discuss the difference between these types of positions. We will also look at the mechanisms for opening buy and sell positions in the trading terminal.

What are long and short positions in Forex?

What traders refer to as a long position is a buy trade. If you open a long position, you’re buying a currency. In this case, it is better for you if the market rises above the point at which you bought an asset, i.e. opened the long position. With favorable market growth, the trader makes a profit after the trade is closed.

A short position is a sell trade. If you go short, you are selling the currency. In this case, you want the market price to fall below the point at which you opened the short position. The trader makes a profit from the decline in the price of the asset.

The terms long and short positions are some of the most popular slang words used by forex traders around the world.

What happens when you open a position in the trading terminal?

Each trade consists of 2 counter transactions: buy and sell or open and close transactions. It's simple enough if your base account currency is the US dollar. In this case, the trade is opened in one step. If you open a trade in the GBP/USD currency pair, you’re buying the pound and selling the dollar. The opposite happens when you sell a Forex currency pair by entering a short position. In this case, you will be selling the pounds and buying the dollars.

If the base currency of your trading account is not the dollar - for example, the Japanese yen – then the process is different. First, you’re buying the dollars for the yen, and then the operation of buying/selling the national currency in the traded pair takes place.

In the case of cross rates that don’t have the dollar in them, such as the EUR/TRY, several transactions occur. Let's say the account currency is Japanese yen and we want to open a long position in the EUR/TRY. In this case, first the dollar is bought for the yen. After that, the base currency, the dollar, is sold in the USD/TRY pair and the Turkish lira is bought. Only after these operations the buying of the EUR and the selling of the TRY happens in the above mentioned pair. If we open a short position, we first buy dollars for the account currency - the yen, then we buy the euros for the dollars in the EUR/USD pair, and finally we sell the euros for the Turkish lira in the EUR/TRY pair.

In the trading terminal, all operations are performed automatically and very quickly. The trader does not participate in them and only sees the final result – the open trade.

Article last updated: 2022-10-28

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