Buying vs. Selling: Going Long and Short in Forex

You’ve noticed by now that the forex market—and all financial markets, for that matter—bring about a whole new vocabulary. Traders even have funky words for buying and selling a currency pair. Traders say they are “going long,” and “going short” a currency pair when they make a trade.

Let’s try to understand what they mean.

Going Long

Traders are said to be “going long” when they buy a currency pair. In the last tutorial, you learned that when you “buy” a currency pair, you are buying the first currency (the base currency) and selling the second currency (the counter currency).

To make it all really simple—going “long” EUR/USD means that you’re buying Euros with US Dollars. You’re long the EUR/USD exchange rate because you traded Dollars for Euros.

Going Short

Traders are “going short” when they sell a currency pair. When you sell a currency pair, you’re selling the first currency (the base currency) and buying the second currency (the counter currency).

To make it all really simple—going “short” EUR/USD means that you’re buying US Dollars with Euros. You’re short the EUR/USD exchange rate because you traded Euros for Dollars.

Pair Examples

Let’s take some time to practice what we’ve just learned with individual currency pairs:

GBP/USD – This is the exchange rate for the British Pound and the US Dollar.

• If you think the Pound will gain value against the Dollar, then you would buy the GBP/USD pair. You would be “going long.”
• If you think the Pound will lose value against the Dollar, then you would sell the GBP/USD pair. You would be “going short.”

USD/JPY – This is the exchange rate for the US Dollar and the Japanese Yen.

• If you think the Dollar will gain value against the Yen, then you would buy the USD/JPY pair. You would be “going long.”
• If you think that the Dollar will lose value against the Yen, then you would sell the USD/JPY pair. You would be “going short.”

Now let’s see how you can make a trade based on what you think about a currency. You have these two thoughts about the Dollar and the Euro:

1. You think that the US economy is going to get weaker in the coming weeks or months because people are losing their jobs. The US dollar should fall in value.
2. Meanwhile, you think that the European economy is going to get stronger, since the European economy is adding jobs. The Euro should rise in value.

So how would you make this trade with the EUR/USD pair?

Well, you want to make money if the Euro goes up in value against the Dollar. So, you would buy (go long) the EUR/USD pair, since buying the EUR/USD pair will give you a profit when the Euro strengthens. In effect, you’re swapping soon-to-be weaker Dollars for soon-to-be more valuable Euros.

After the Dollar gets weaker, you would trade back your more valuable Euros for less valuable Dollars and have more dollars than you had when you made the prediction. Cha-ching!