Forex traders, like stock traders, are always trying to determine whether the market will rise or fall so that they know how to position themselves. When traders anticipate that a downturn is coming and that the price of currency will drop, they execute a strategy known as a "short position" by selling the currency. Traders assume that the difference between the price at which the currency contract is sold and the price at which they will buy it back after the price drops will provide them with a significant profit.
There are a lot of benefits to short selling. Prices in the Forex market generally drop faster than they rise. They often rally gradually as volume increases until they reach a peak, and then trading volume tapers off. This is a signal for short sellers to sell.
Likewise, when a reversal does occur, there is more momentum than with the up move. Volume increases until the prices reach a point at which trading stops. This is the short seller’s signal to buy back.
The opposite strategy is the "long position". Traders anticipate that the market will rise and they buy currency so they can sell it at a higher price after the upturn. In the Forex market you are in a long position when you have bought the base currency, which is the first currency in a currency pair.
Remember, currency is traded in pairs, which means that a trader is purchasing one currency and selling another at the same time. So for every transaction a trader is long in one currency and short in the other. The first currency in the pair or the base currency is the one that has been purchased. The second currency in the pair or the counter currency is the one that has been sold.
Disclimer: This website is for informational purposes only and is not intended to provide
specific commercial, financial, investment, accounting, tax, or legal advice.
History
