Going long and short in currencies

The currency market uses the same terms to express market positioning as other financial markets. Understanding what those terms mean can help you to better define your position in the market. Let's take a look at what these terms are, and what they mean:

The first two terms to consider are going long and going short.

Going long-
Going long refers to the market position in which you've bought a security and you are waiting for prices to go higher. In other words, when you buy a currency pair and wait to sell until the prices are high. When you go long, it means you are looking for prices to move higher, then you can sell at a higher price than when you bought. When you want to close a long, you have to sell what you bought. Of course, you may be buying at different price levels, so how do you take this into consideration when creating your strategy? When you buy at multiple price levels, you are adding to long, and getting longer.

Getting short-
A short position in the stock market is when you've sold a security that you never owned. When you sell a stock short it requires you to borrow the stocks, so you can sell it. In the forex market, it means you've sold a currency pair, meaning you sold the base currency and bought the counter currency. In other words, you are making an exchange, but you are doing it in the opposite order and according to currency-pair quoting terms.

When you sell a currency pair it is called going short or getting short, and it means you are looking for the pair price to move lower so that you can buy it back at a profit. If you sell at various price levels, it is called adding to shorts and getting shorter.

One thing worth noting is that going short is as common as going long in currency trading. Selling high, buying low is a common trading strategy. One of the most important things to remember is that currency pair rates reflect relative values between two currencies, not absolute price of a single stock or commodity.

Currency pair prices are as likely to go up at any moment as they are to go down, which is why forex traders often go short, in order to leverage the falling currency prices. If you are use to trading in other markets, short selling is something you have to get your head around.

Squaring up-
Squaring up means having no position in the market. It is often called getting square or going flat. When you are short the only way to do this is to buy to square up. If you are long, you have to sell to go flat. This is the only time you have no market exposure or financial risk.