Whenever you are trading in any sort of market you will likely come across the terms “going long” and “going short”. But what exactly do they mean?
To “go long” in forex is to BUY a currency with the expectation that it’s value will RISE so you can then close your trade for profit. The aim – Buy low, sell high.
To “go short” in forex is to SELL a currency with the expectation that its value will FALL so you can then close your trade for a profit. The aim – Sell high, buy low.
How does a trade work?
Whenever we make a trade, we can also call it entering a position. A position is the amount of currency that you own that is subjected to market exposure and thus its value will fluctuate against other currencies in the market.
Important: Every currency trade that we make involves a pair. This means that you will always be going long on one currency while simultaneously going short on the other.
In other words, when we enter a long position, we are hoping that the base currency strengthens against the quote currency.
For example, we buy EUR/USD at 1.114 – This means that we are long on the Euro while simultaneously being short on the US Dollar.
In its essence, we are betting that 1 EUR would be worth more than 1.114 USD at the end of the trade.
This may seem complicated, but this is in fact how all of the trading markets work across the globe. Let’s take an example from the London Stock Exchange.
Let’s say we buy some shares in GlaxoSmithKline(GSK) at £18. This means we are going long on GlaxoSmithKline against GBP – in other words, we are going long on GSK shares while shorting GBP because we feel that the value of the GSK shares will grow in value faster than GBP will.
If this was a forex currency pair we would call it GSK/GBP.
While longing is a relatively straightforward concept, people tend to have a harder time understanding the concept behind shorting.
At its most basic level, shorting is the exact opposite of longing, but for the sake of clarity let’s clear it up here.
When you short a currency pair, the base currency is SOLD while the quote currency is bought. This is what gives the simultaneously longing and shorting in every trade.
Shorting USD/JPY = selling USD and buying JPY.
We are effectively betting that the USD will decrease in value against JPY.