One of the beauties of Forex trading is that we can make money if a currency is potentially about to rise or fall. We don’t need a currency to rise in value for us to make money, we can make just as much money when a currency is about to fall in value.
When we are about to buy a currency we will advise you that we are about to go long. That means we are going to be buying a currency and wanting it to increase in value, and again we call this going long when we buy. Now of course at some point in the future whether it is an hour or 48 hours we will sell that currency and with a bit of luck make a profit.
Equally as we bought a currency and can make money when it rises in value we can also sell a currency and make money when it falls and this is called going short. So when you hear us say we are about to take a sell position and go short this simply means we are going to enter a trade and we want the currency to fall in value. Let me give you a very brief and basic understand of the difference between going long and going short.
Going long we buy something and sell it at a higher or lower price and make a profit or a loss.
People often say to me, Andrew how can I go short on a currency and sell something and buy it back when I don’t own it to begin with. Let me explain how you can go short and make money on virtually anything.
Imagine we are at the fruit market and you are an experienced fruit grower and you know that the price of oranges is going to go down in the next week due to an oversupply of oranges at the market. How can you make money with this knowledge?
You could ask to borrow from another friendly grower a crate of oranges (or a car load LOL) worth $1000. Of course you would need to commit to giving back a crate of oranges to the friendly grower you borrowed them from. So you borrow a crate of oranges worth $1000 and that same day you sell the crate of oranges at the market for the current market price of $1000. You have $1000 in your pocket and the person who you sold the oranges too has a crate of oranges at the current market price, a fair deal. The next day the news hits that the market has an oversupply of oranges and within hours the market price for oranges is now $500. Bingo, time to take advantage of the drop in price and give back the crate of oranges you borrowed. You have $1000 in your pocket so you simply buy a crate of oranges at the current market rate of $500 and give back the crate of oranges that you owe the friendly grower. How much are you left with? A profit of $500.
Let’s recap what happened. You borrowed a crate of oranges, sold it, bought it back and made $500.
Now let’s see this works on the currency market. You anticipate that the USD is about to fall, you go short (sell) the USD on your trading platform, the price of the USD does indeed go down in value, you then buy it back and profit from the difference of where you entered and exited.
Now of course if the price of our Oranges had increased in value and not decreased it would have meant we made a loss on our transaction and the same thing would apply if the USD rose in value when we predicted it would fall.
