Go long. Go short. You have certainly heard these two phrases countless times if you have any dealings with financial markets. In another article, we have already discussed the idea of a short position and its relationship to the forex market at length.
What about a long position? Is it the same as buying? Is it really that simple? If we look at it from the perspective of making profits. Then we can say that a long position is one that ends in profit if the value of the asset in question rises.
Where we had the short position as betting against an asset. The long position is betting in favor of an asset. So let’s see exactly what this position means in the forex market and you can earn profits through trading with this position.
What Is the Definition of a Long Position?
When you decide to go long on an asset, you will only make profits if the value of that asset increases and not the other way around. This is the basic definition of a long position.
Naturally, the other point of this position would be a short position. Whereas in a short position you bet that the value would drop, in the long position you bet that the value would increase.
This is why many, especially those who are not market savvy would designate the long position as buying an asset.
Now what happens when you long on a forex currency pair?
Going Long on Forex Trading Pair
Taking a long position with regard to a forex trading pair will have to do with the currencies that are used to create the pair in the first place.
Of course in any forex pair the first currency is the base currency and the second currency is the quote currency. The position that the trader takes in the forex market will always be first and foremost related to the base currency.
As a result, when you take a long position on the forex trading pair, then it means that you are betting that the price of the base currency is going to increase.
In other words, you are buying the base currency. And in exchange you are going to pay the quote currency. And of course the reason you are willing to pay the quote currency and receive the base currency is exactly why you have taken a long position. You anticipate that the value of the base currency is going to increase.
Why Do Traders Go Long Position in Forex?
To find out why traders take a long position in the forex market, let’s consider a trading pair first.
For instance, the British Pound against the US dollar, shown as GBP/USD, is one of the most traded pairs in the whole market and is responsible for a great portion of all the volume that is traded in the foreign exchange market.
Each currency pair also has a quote or rate, which shows you the relationship that the two currencies have compared with each other. This quote or number will tell you how much quote currency you need to buy one unit of the base currency.
So in the currency pair that we discussed earlier, the quote is as follows:
GBP/USD = 1.098
This means that in order to buy one British pound, you will need 1.098 US dollars.
In this case, if you take a long position with this pair, your analysis or your intuition as a trader have shown you that the base currency or the British pound is going to increase in value.
But this increase in value is not just out there in the ether. This increase in value is exactly compared with the value of the US dollar, which is the denomination of the pair in this example.
So if your hunch is correct and the value of the pound increases against dollar, then the following quote might be obtained:
GBP/USD = 1.102
Now please keep in mind that this is just an example. But in this example, at the beginning you had a British pound which was equal to 1.098 dollars. And now, for every British pound you have 1.102 dollars.
That is a difference of 0.004 dollars for every unit of the base currency you have in your long position.
Again to take this example further, if your position size included 10,000 units of the pairs, then from this long position on the pair you have profited $40 – from just one position.
What Is the Significance of the Long Position?
The most important significance of the long position can be seen in the historic performance of almost all assets. Stocks, commodities, bonds, precious metals, and even foreign currencies.
As a whole, when you look at the value of various assets and financial instruments in the past, almost without fail the predominant majority of them have gained in value.
So any form of a long position would have resulted in profits for the trader of the investor provided that enough time has gone by. Even if the decision to go long was not very well thought out.
This is why everyone always tells you to diversify your portfolio. When the key to diversification is not by taking short positions. You do not earn the assets, especially in the long term by going short.
The key is going long, because it is only through long positions that can actually become the owner of a diversified asset class through time.
Furthermore, historical stats again show that a long position is the position that is least exposed to risk in the long term. Because of the notion that we discussed at the beginning of this section, a long position will ultimately result either in profits or an evening out of price movements.
So in the final analysis going long can be your safest bet.
At the same time, you need to be careful about your long positions. Because of the unpredictable nature of the forex market, or any other market for that matter, things could turn in a direction that would result in losses for your position.
Even if you have found a solid and reliable bullish trend and have decided to ride the trend by going long, chances are the trend might experience a reversal and go toward bearish territory. Of course, in that situation you would sustain losses.
But that is the point of any trading strategy – risk management.
You always need to be thinking of unfavorable conditions and have a risk management or exit strategy prepared for it.
A long position is one in which the trader is betting in favor of the asset in question. This means the trader is anticipating that the price of the asset will increase rather than decrease. So when the price eventually increases, that is when the profit of a long position is made.