Understanding Short and Long Positions
Terminology is important when investing in Forex Trading. Knowing the terminology is the first sign that the training path that, without ifs and buts, the aspiring trader has had to undertake is bearing fruit.
Among the first terms that one comes to know, "short" and "long" stand out. What does short mean? What does long mean? In short, they are synonyms for "sell" and "buy" respectively. Consider a hypothetical trade on the euro-dollar. When opening a "short" position, an activity that in jargon is often called "shorting", it means that you intend to sell euros to buy dollars. On the other hand, when opening a "long" position, it means that you are about to buy euros in exchange for dollars. For the equity-market variant of the "short" side of this trade, see naked short selling.
Obviously, knowing the terminology, while being fundamental, is not enough on its own. It is necessary to know when to position oneself short and when to position oneself long.
When to Go Short or Long
As a general rule, it is good to go short when the first currency of the exchange in question is immersed in a negative trend, that is, when it is about to lose its value against the second currency. If the euro-dollar exchange rate is depreciating, and therefore the euro is weakening against the dollar, it is better to sell, thus positioning oneself short. Similarly, if the trend is positive, it is good to go long, because the euro is appreciating. Retail positioning data can also inform this call when read against the crowd; see forex retail sentiment explained.
The Risk of a Trend Reversal
However, it is not always the correct choice. The fact that the trend is positive or negative does not mean that it will be forever. Indeed, in some cases, a breakout could occur, that is, a change of direction that invalidates the reasoning previously exposed. In this case, positioning oneself long when in an uptrend and positioning oneself short when in a downtrend is a mistake that can be costly.
Anticipating a Trend Break
So, what to do? The only solution is to try to predict when the trend is about to break. To do this, it is necessary to use the resources of technical analysis, thus using those indicators that can offer signals of a certain effectiveness in this sense.
