Talking about trading, people mostly use the expressions ‘long’ and ‘short’ to identify two types of trades. Still, it might be confusing to understand the meaning of these terms.
The fastest way to determine ‘long’ and ‘short’ trades is to say that in any trade, traders are long of that from which they will profit once it rises in relative value and short of that from which they will profit when it falls in relative value.
Also, they must point out that in a trade where traders are short of a currency against a tangible asset, they typically refer to that as a long trade. And not to say they were short of the cash denomination.
One more way to understand the difference between long and short trades is that if they make a trade where they wish the price to increase in a chart, they are long of that instrument. Then, if they want the price to fall in the chart, they are short of that instrument.
The Long and Short Forex Trades
Unlike other markets, forex is different because whether traders are making long or short trades, they are always long of one currency and short of another.
The important part about the long and short trades question in forex is any interest they may need to pay to their forex broker if they hold a position overnight – or alternatively receive from the broker.
Then, this is calculated by reference to the interest rates where banks lend specific currencies to each other. Unfortunately, there are times forex brokers use this as a subtle way to make extra money from their clients.
Frequently Asked Questions
- What is the meaning of long and short in trading?
‘Long’ basically means the trade makes a profit when the price increases. Meanwhile, ‘short’ means the trade makes a profit when the price declines. In forex, traders are always long one currency and short another when they open trades. But in stock trading, they must borrow shares and pay interest on them when traders go short.
- What does short trading mean?
In stock trading, a short is where people borrow shares they do not own to sell, wishing the value to go down to make a profit from repurchasing them and returning them to the loaner.
Usually, a short trade needs to be financed by a daily interest payment to the loaner, and the payment of amounts equals any dividends issues as the trade is still open.
- Is it possible to long and short the same stock?
Traders can long and short the same stock. But some brokers do not allow this hedging. And even if they allow this, it often makes no sense if the trade quantities long and short are the same sizes.
- What is a long/short strategy?
The long or short strategy is when traders purchase some shares – going long – while at the same time, selling – going short – other shares. Once the long and short becomes evenly sized, the strategy is theoretically ‘market neutral, indicating that it can profit even if the stock market overall rises or declines.