When you are new to the forex market, you need to be thorough with the basics for building a strong foundation and moving forward in your trading journey. One of the very first lessons that you need to learn as a new trader includes understanding the currency pairs and the concept of trading for a profit. When you are a forex trader, you can choose between taking a long position and a short one while opening a trade. The type of position you take up while entering a trade is crucial as it determines the success of your trade in the end. This article can be perfect for beginners who are still trying to learn about different trade positions as well as for anyone who needs to brush up their knowledge about long and short positions in forex.
Meaning of Position in Forex – Long and Short
The meaning of “position” in the context of forex trading is basically the perspective and prediction of a trader about the possible price movements that they expect for a particular currency pair. It represents the direction of a trader’s bet on the potential movement of exchange rates. The type of position that they want to hold for a currency pair is an important aspect of their trading decisions. The position can be either “long” or “short.” A long position is taken when you anticipate a value appreciation for the base currency in a pair, allowing the trader to profit from the price rise. On the other hand, a short position is opened when the trader thinks the base currency’s value will fall against the quoted currency, and they just try to make a profit by placing a sell order.
When traders enter positions, they are essentially making informed predictions about how a currency pair will behave in the market. These predictions are based on various factors such as economic indicators, geopolitical events, and technical analysis. The size of a position is determined by the trader’s risk tolerance, account size, and market conditions. Position size calculations need to be done with the most precision to minimise the risk without compromising the profit potential. The usage of automated tools like Forex calculators helps keep the calculation simple by providing instant and accurate results, allowing you to make sound trading decisions based on the available metrics.
Traders often use leverage to magnify their positions’ potential gains (or losses), adding a layer of complexity and risk management to the equation. Deciding and managing positions is a crucial aspect of successful forex trading. Traders need to monitor their positions closely, as the forex market is highly volatile and can experience rapid and unpredictable price movements. Stop-loss and take-profit orders are commonly used tools to manage risk and limit potential losses. Additionally, traders might adjust their positions based on changing market conditions or new information that comes to light.
Basics of Currency pairs
Before moving forward, we need to take a closer look at the concept of currency pairs, which are the trading instruments you will buy and sell in the forex market. Currency pairs are the most liquid and volatile asset class, making them highly popular trading instruments. They are different from other financial instruments; hence, forex traders must choose a platform that supports currency trading. Most traders tend to go with two platforms, MT4 and MT5. Where beginners go for MT4, experienced and multi-asset traders choose to trade on the latter due to its useful trade-related features. Both platforms can be used for demo trading, but most traders go for MT4 due to its simple UI that allows them to learn and understand trading concepts in a better way.
Now, coming back to currency pairs, just as the name suggests, a currency pair consists of 2 different currencies, and the price of a currency pair represents their exchange rate. This is how forex traders make profits from exchange rate fluctuations. The first currency in a pair will be the base currency, which is being bought or sold in a trade. The 2nd currency in the pair is the one for which the base currency is being exchanged, which determines its value or price in a trade.
When you take a position, you state what you choose to do with the base currency in a particular currency pair, whether you will buy or sell it for the trade. If you intend to buy the base currency in pairs, you will take a long position and a short position is opened for selling the base currency instead. But how do you choose the type of position that should be opened for making profits while trading a particular currency pair? This is what we are about to discuss in the next session.
Determining the type of position to be opened in a trade
The type of position that a trader prefers while trading depends on how they analyse the market situation and what type of price movements they expect to see in their chosen currency pair. When they anticipate the price of a currency pair to go up, you will be going long or, in other words, opening a long position, to buy the base currency and sell the quoted currency with the intention of making a profit once the pair reaches the higher price that you are aiming for. But when you see the possibility of a price fall, you will be shorting the pair by opening a short position to sell the base currency and buy the quote currency.
A long position means the base currency will gain more value against the quoted currency. For instance, if you go long on USD/JPY, you are confident that USD will perform better than JPY with a potential price rise in the near future in case of short-term strategies or a steady uptrend if you are following a long-term strategy with a longer timeframe. But if you sense a possibility of USD falling in value against Yen, you will be shorting the pair instead to make profits during a bearish price movement. Those who go long on a pair will have a bullish outlook for the pair, whereas those with bearish views will be entering a short position.
Generally, there are two types of traders. The first category includes those who prefer to follow the trend by placing trades in the same direction of the market. They will go long when they see the possibility of an uptrend or the analysis signalling bullish sentiments and will try to short the pair once the sentiments become bearish. There are also traders who go against the trend as they expect a sudden reversal to happen during an ongoing trend, and they will choose the opposite side instead of going with the trend. Such traders will open a short position when there is an uptrend since they think the prices will be falling later on.
The logic behind Long position in Forex
Several factors should be considered when deciding when to enter a long position. Firstly, thorough technical analysis is essential. Traders often look for indicators like moving averages, trendlines, and relative strength to identify potential entry points. These indicators help gauge the overall trend and momentum of the currency pair. A currency pair being oversold at the moment often suggests the possibility of a potential price rise that should be happening in the near future.
Secondly, staying informed about economic indicators and events is vital since fundamentals also play a key role in currency price fluctuations, especially when you are following a long-term strategy. Positive economic data or developments in a country can boost its currency, and traders should keep an eye on key indicators like GDP growth, employment data, and central bank announcements.
The logic behind Short Position in Forex
While opening a short position in a pair, traders are quite sure about the possibility of the base currency weakening against the quoted currency. In the case of technical analysis, overbought conditions, such as divergences in oscillators like RSI or stochastic indicators, suggest a potential reversal would be a solid reason to short your pair. Key support levels and observing bearish candlestick patterns like evening stars or bearish engulfing patterns can provide entry cues. For those who conduct fundamental analysis, negative economic data releases, geopolitical uncertainties, or shifts in central bank policies that might weaken a currency can offer opportunities for short positions.
Conclusion
To conclude, determining the type of position you would opt for a trade is a complex process for a beginner. But it will become easier as you gather more knowledge and experience in the market. Forex Demo trading is one of the best ways to understand trade positions in a realistic yet risk-free setting. It is the perfect place for anyone wanting to gain practical knowledge and enhance their trading skills.
