What New Traders Should Know
To trade foreign currency, you buy or sell a currency pair. All currency pairs have a base currency and a quote currency. The pair usually looks something like this: USD/JPY = 100.00. Here, the USD, or U.S. dollar, is the base currency and the JPY, or Japanese yen, is the quote currency. This quote shows a rate of $1 being equal to 100 yen. Because every currency trade involves a pair, you will always simultaneously go long on one currency and short on the other when making a trade. When you are long on a currency, it means you are betting the base currency will strengthen against the quote currency. In the example above, you’d be betting the dollar would be equal to more than 100 yen in the future. So in a long trade on this currency pair, you are buying, or going long on, the dollar and you’ll simultaneously go short on the yen. In effect, you are selling the yen, just like when you short a stock by selling shares. To borrow an example from the stock market: When you buy the stock of a company such as Apple (NASDAQ: AAPL), you are going long in Apple stock and short the dollar because you feel the value of a dollar will not grow as fast as the value of Apple stock. You could also look at this relationship as APPL/USD. Also, when you sell your stock back, you can think of it as going long in the US dollar, and short on the stock because for one reason or another you now believe it is more valuable to have cash in dollars than it is to hold the stock.
How to Go Long
Because you’re both buying and selling currency when you make a forex trade, you can speculate on both the upward and downward movements. To go long on a certain currency, you open a trade in a buy position, because you believe the base currency is bullish—likely to rise in value. At the same time, it also means you are bearish on the value of the quote currency, and think it will fall. If you’re correct and the value of the base currency rises, you can close out your trade then at the current market price and take a profit.
Pips
You can measure the changes in value in pips: a pip is 0.0001 of the value of the quote currency (except for yen, where a pip is .01 of the value).
Why Go Long in Forex?
Some of the reasons that traders go long come from technical as well as fundamental developments. With fundamental analysis, you’ll be looking at economic news related to the currencies in question. For example, if news releases start to overshoot or surprise economists’ expectations, this shows that the economy is doing better than many people expected and there’s room for upside on that currency. Therefore, it may be worth buying the currency, or going long. Another reason forex traders may decide to go long a currency pair is when a central bank announces its plans for monetary tightening, which historically tends to lift its currency’s value. Technical reasons for going long often include currency prices breaking through a certain price-level resistance or a price ceiling. This would show surprising strength in the currency’s price mobility and that a new market imbalance may be developing that could turn into a strong trend. Traders also tend to go long when the currency price comes down to a well-defined support level or a price floor. Trend-following traders who watch trend acceleration often go long on a trade position and hope to stay in that trade until the trend expires.
