Friday, March 23, 2018

What Does Going Long or Short Mean?

Going long and selling short are fundamental ideas in day trading that every aspiring trader should understand. But for those beginning to learn about Forex trading, each term can be difficult to define. What exactly is short selling and going long? What are the advantages of either trading strategy?

In the simplest terms, a trader can make money by buying low and selling high (going long) or by selling high and buying low (selling short). Forex day traders, then, have two specific ways to profit in a trade. They can enter the market when the price is highest or at a low, enabling them to make money in up-trending and down-trending markets.

With stocks, there is a bias for bullish movement in the markets; stocks are more likely to move in an upward. But the Forex markets are more volatile; prices may fluctuate in both directions fairly consistently. With short selling and buying long, traders have an opportunity to profit in whichever way the market is trending, and as currency pairs tend to oscillate in either direction, there is more opportunity to use short selling in Forex trading.

Understanding Short Selling and Going Long

So now you have a basic idea of these two fundamental terms. But they are a bit more complex. What exactly does "buy low, sell high" and "sell high, buy low" mean? And how can traders profit off of each style?

Going Long: When a day trader goes long, they are buying into the market at a low point. The trader expects the market to rise, so that after the rise, they can sell the security back at a profit. In Forex trading, the buyer chooses a currency pair, for example GBP/USD. The trader is actually buying the first currency and then selling the second. So if that trader bought British pounds (GBP) and the price went up relative to U.S. dollars (USD), he or she would earn money on the trade. They would buy GBP low, in USD, and then sell the U.S. dollars back to gain more GBP.

Short: Short selling is just the opposite. But it often causes a bit of confusion for beginner traders. You might be wondering: How can I "sell high and buy low" when I don't actually own the security? Short selling requires a broker to lend you a security, say for instance EUR/USD. In short selling, the trader is essentially selling the first currency and buying the second, with the hope that the market will fall. So, in this case, the trader would borrow euros from a broker and sell them at a specific price to buy USD. Then, after the market falls, the trader would buy back the borrowed euros with USD, ultimately pocketing the difference in value.

As you can see, short selling is a bit more complicated than going long, but both strategies are equally valuable to day traders. Depending on the movement of the market, either strategy can be used to profit, and traders who know how to successfully use both are in a better position to maximize their profit potential.

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