Long position and short position in Forex
What are short and long positions?
One reason more
speculative investors are choosing to start trading Forex is that it
is possible to speculate that prices will go up as well as down. While a
classic investment is almost always only suitable for hoping for a positive
development of certain values, investors in forex trading can also benefit from
falling rates of the corresponding currency. In the following guide I would like to inform you how you can speculate on falling or rising prices and
what the so-called short and long positions are all about.
Contents:
- Prices
rise and fall
- long
positions
- short
positions
- Fees
for long & short positions
- Build
a long position
- Build
short positions
- Conclusion
Exchange rates can rise and fall
As you know, forex trading works by speculating that one currency will rise or fall in value against another. As a result, forex trading is always based on the value ratio of two currency pairs to one another, the exchange rate. So if I take for example the euro and US dollar currency pair, the value of the dollar against the euro can rise or fall at any time. The exchange rate, which can "run" in one direction or the other, then changes accordingly. For example, if you decide to speculate that the dollar will rise, you are simultaneously assuming that the euro will decrease in value against the dollar for the currency pair mentioned above.
Most speculative
investors are also optimistic about the price development when trading forex
and consequently decide to speculate on the rise of a currency
price. Accordingly, the buy orders predominate in the market if you draw a
direct comparison to the sell orders in terms of volume.
Whenever you have
bought a certain currency and therefore hope for a price increase, a so-called
long position is formed in your trading account. So long position means it
is a real stock position because you bought the corresponding currency. In
the above example, this would mean that you have bought, say, $10,000, which is
subsequently booked as stock in your trading account. A long position is
completely independent of which currency you choose. It is only important
that it results from the fact that you have bought a certain foreign
currency. If you want to liquidate a long position again, you simply have
to sell the respective currency that is in the portfolio on the foreign
exchange market. You can do this
The short position
is nothing but the opposite of a long position. While you are buying a
foreign currency in the long position, the short position is formed by selling
the US dollar as a foreign currency, for example. It is important that you
did not previously have the respective foreign currency in your inventory.
A short position is sometimes referred to as a previous short sale because you are selling a currency that you do not own. So if you think the US dollar will weaken against the euro in the future, this is the ideal time to go short and therefore place a sell order in the market. Once this order has been executed, the short position is formed and the sold dollars are deducted from your trading account. It is important to know that short positions may have to be balanced after a certain period of time, while long positions can usually initially exist indefinitely.
Different costs for short and long
positions
In addition to the
fact that you are speculating on the foreign currency going up when you are
long and that you are speculating on it going down when you are short, there is
another difference. This refers to any costs that may arise for the
respective item types. It is primarily the funding cost that forex brokers typically charge when holding a position overnight.
In principle, it
does not matter whether it is a long or short position as far as the
determination of the financing interest as such is concerned. In a normal
interest phase, it is usually the case that you are credited with interest for
a long position, while you have to pay financing interest to the CFD broker for a short
position. This interest is due because the broker is lending you money through the
leverage, which of course means a capital outlay for him. As a rule,
however, the financing costs are so low in relation to the volume traded that
they should not affect your decision as to whether you buy or sell a foreign
currency, i.e. whether you form a long or short position.
How do you build a long position?
Now that you know
what a long and short position is, I would like to briefly explain how a long
position and a short position are structured in detail. The basic
requirement for the long position is that you want to speculate on a rising
value of a foreign currency. In this case, an order could look like this:
Buy order: 50,000 US dollars
Price: 1.1256 dollars (per euro)
Equivalent value: 44,420 euros
Long position
above: $50,000
In this case,
$50,000 would be booked as a long position in your trading account. As a
result, you can either sell all or part of the inventory, thereby reducing the
position. The long position is thus reduced simply by placing a buy order
for the US dollar in the market.
How is a short position established?
To create a short
position, you must sell foreign currency that you do not hold. This works
via a sell order and can look like this : Sell order
: 20,000 Swiss francs
Price: 1.0624 francs (per euro) Counter value
: 18,825 euros
Short position: 20,000 Swiss francs
In order to then liquidate or smooth out this short position , you need to buy
20,000 Swiss francs against euros. Of course, it is also possible in this
case to offset only part of the position if, for example, you want to take
price gains that have already been made.
Conclusion on the long and short position
As an investor, you
may not even know which of your previous forex trading orders generated a long
position and which generated a short position. Basically, these are mainly
technical terms, because the only important thing for most traders is that they
make price gains with forex trading. Whether it was previously a long or
short position depends solely on the trading direction. Whenever you buy a
foreign currency, it is a long position, while selling short (without holding)
a foreign currency results in a short position.
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