Welcome to today’s lesson, most of you must have heard the word “LONG” or “SHORT”, while some of you may understand what the word means, I believe a majority of you may not have a clue at all.
In this lesson, I will just assume that you people have no idea about the word “LONG AND SHORT”. I will try to explain it so that you all will understand what it means and how it’s applied to your everyday forex trading.
What Does Long Mean?
Using the dictionary to check for the word “long” it may talk about height or duration (time). But in finance and most especially in the financial market, LONG means to acquire either a stock, currency, commodity etc.
LONG simply means to BUY. Remember in our lesson How Money Is Made Trading the Forex Market where I discussed “how the buying and selling in the market works” and hope you guys still remember?
If you are confused about these do not worry, l will give another lucid example below.
Consider the word “LONG” to mean buying a loaf of bread in a store, so instead of saying I want to buy a loaf of bread or I bought a loaf of bread we can just say I want to long a loaf of bread or I went long on a loaf of bread, I know it sounds funny right except this loaf of bread actually is a currency pair.
What Does Short Means?
Short is entirely the opposite of long, which is, SHORT means to sell. Remember I said when we long a currency pair; we are actually buying the base currency and selling the quote currency.
Simple right? However, many of you might be confused about all long and short stuff that is why I still decided to explain it further using a forex trader called Jane.
Jane is a forex trader from Australia, so she knows how her country economy is doing and she wants to trade the pairs Australia Dollar and United State Dollar (AUDUSD) and Australian Dollar and Japanese Yen (AUDJPY) with a standard lot size.
After numerous analyzes she decided it is time to go long (buy) on AUDUSD and go short (sell) on AUDJPY. On the pair AUDUSD, she placed a buy trade, which instructs her broker to buy 1 lot size of AUD and sell the equivalent of in USD.
The broker finds the best match for her in the forex market, by finding someone who is willing to sell AUD and buy USD in return. However, when SHORTING a pair, it is totally different.
On AUDJPY, Jane sold AUD and buys JPY. I believe only a few of you might ask “did she sell what he didn’t have?”
Actually that is true, unlike going LONG where the quote currency (that is the last currency in the pair is sold). In Shorting, the based currency is sold first and then the last (base) currency is bought.
How is this possible?
Your broker technically sold a certain amount of currency, which you never owe; only to buy it back when the price depreciates that is fall further from the price earlier bought at.
Probably I have gotten you more confused.
When should we go long or short?
This is one of the problem newbies have about the market is that they do not know when to go LONG or SHORT.
In summary, it is basically based on your trading plan and strategy and you should never place any order in the market because you feel or think it will go up or down but rather based on your proposed rules and law you have set up for yourself.