FOREX ARTICLES

In Forex market you may buy or sell currencies. The objective is to earn a profit from your position. If you have bought a currency, for example, and currency appreciates in value, then you will earn a profit by closing your position. When you close your position and sell the currency back in order to lock in the profit, you are in actuality buying the counter currency in the pair. By trading currency pairs, one currency valued against another, a rate of worth has been established. After all, a country’s currency has value only relative to the currency of another country.

So, what is the position?

Position is the netted total commitments in a given currency. A position can be either flat or square (no exposure), long, (more currency bought than sold), or short (more currency sold than bought).

In the Forex market, currencies are always priced in pairs; therefore, all trades result in the simultaneous buying of one currency and the selling of another. The objective of currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased its value relative to the one you sold. If you have bought a currency and the price appreciates in value, the trader must sell the currency back in order to lock in the profit. An open trade or position is one in which a trader has either bought/sold one currency pair and has not sold/bought back the equivalent amount to effectively close the position.

If you want to buy the base currency, you are considered to be "buying" the currency pair. Also know as “going long” (or longing the market). Going long the EUR/USD pair implies buying the base currency and selling an equivalent amount of the second, quote currency. It is not necessary to own the quote currency prior to selling, as it is sold short on the open market and used to secure your long position on the base currency.

The same rules apply to going short as they do to going long, only in the opposite manner. If you think the base currency is going to depreciate in value against a particular currency (or equivalently, that the secondary currency will go up relative the base currency), instead of buying that currency pair, you would sell it. This is known as shorting the market. Going short the EUR/USD pair implies selling the base currency so you can buy an equivalent amount of the second, quote currency (at the current exchange rate, of course).

In other words, when you buy a currency, you are said to be “long” in that currency. Long positions are entered into at the offer price. Thus if you are buying one GBP/USD lot quoted at 1.5847/52, then you will buy 100,000 GBP at 1.5852 USD.

When you sell a currency, you are said to be “short” in that currency. Short positions are entered into at the bid price, which is 1.5847 USD in our example.

Because of the symmetry of currency transactions, you are always simultaneously long in one currency and short in another. For example if you exchange 100,000 GBP for USD you are short in sterling and long in US dollars.

An open position is one that is live and ongoing. As long as the position is open, its value will fluctuate in accordance with the exchange rate in the market. Any profits and losses will exist on paper only and will be reflected in your margin account.

To close out your position, you conduct an equal and opposite trade in the same currency pair. For example, if you have gone long in one lot of GBP/USD (at the prevailing offer price) you can close out that position by subsequently going short in one GBP/USD lot (at the prevailing bid price).

Your opening and closing trades must the conducted through the same intermediary. You cannot open a GBP/USD position with Broker A and close it out through Broker B.