The ability to go long or short is my favorite part about the Forex market. If you recall from the lesson on Forex vs stocks, I mentioned that this is my favorite advantage of Forex over the stock market, because you can profit regardless of whether the market is moving up or down.
In this lesson we’re going to cover what ‘long or short’ means and also cover the different order types at your disposal.
First and foremost, let’s discuss the meaning behind long or short by breaking down each term…
Long simply means to buy. When you’re in a long trade you’re said to have a ‘long position’, which means that you have bought a security or in our case a currency pair. In this type of trade we want the market to rise above the point where we went long (bought).
Short simply means to sell. When you’re in a short trade you’re said to have a ‘short position’, which means you have sold a security or in our case a currency pair. In this type of trade we want the market to fall below the point where we went short (sold).
Simple enough, right?
When you go long (buy) a Forex currency pair you’re actually buying the base currency (first currency in the pair) and selling the quote currency (second currency in the pair). If you buy EUR/USD you are actually buying the Euro and selling the US Dollar. The opposite is true when you short (sell) a Forex currency pair. So in the case of the EUR/USD you would sell the Euro and buy the US Dollar. Of course all of this is transparent and happens in the blink of an eye. Still, it’s important to know this stuff so you have a stronger foundation for when we get into the more technical stuff in later lessons 😉Wait a minute…how do you buy a currency pair? You don’t…well, not technically.
So now we know what the term means, but how do we actually trade long or short? Let’s take a look…
Order Types
Market Order
Just as the name implies, a market order is an order that is placed immediately at the ‘current market price’. Your broker will give you the best available current price when placing the order. A market order is guaranteed to be executed, however there’s no guarantee on the price at which it’s executed.
A quick note about market orders. Due to the nature of market orders being placed at the ‘best available current price’, you should always double check the bid-ask spread before placing your order. Occasionally, especially during high-impact news events, the bid-ask spread can be quite large even for the major Forex currency pairs. Placing a market order during these conditions sometimes means that you will get ‘filled’ at a less-than-optimal price, putting your trade at a large loss before the market has had a chance to move.
Pending Orders
All of the following long or short order types are called pending orders, meaning they are placed in advance with the belief that future price will react a certain way.
Limit Orders
A limit buy order is an order placed with a broker to buy a certain amount at a given price or better. The order is placed below price when you believe the market will come down to a level and then reverse higher.
A limit sell order is an order placed with a broker to sell a certain amount at a given price or better. The order is placed above price when you believe the market will come up to a level and then reverse lower.
