Placing orders Long and short positions
The ability to go long or short is my favorite part about the Forex market. This is my favorite because you can profit regardless of whether the market is moving up or down.
In this lesson we’re going to cover what ‘long or short’ means and also cover the different order types at your disposal.
1⃣. Long or Short (Buy or Sell)
Long simply means to buy.*
When you’re in a long trade you’re said to have a ‘long position’, which means that you have bought a security or in our case a currency pair. In this type of trade we want the market to rise above the point where we went long (bought).
Short simply means to sell.
When you’re in a short trade you’re said to have a ‘short position’, which means you have sold a security or in our case a currency pair. In this type of trade we want the market to fall below the point where we went short (sold).
*When you go long (buy) a Forex currency pair you’re actually buying the base currency (first currency in the pair) and selling the quote currency (second currency in the pair). If you buy EUR/USD you are actually buying the Euro and selling the US Dollar. The opposite is true when you short (sell) a Forex currency pair. So in the case of the EUR/USD you would sell the Euro and buy the US Dollar. Of course all of this is transparent and happens in the blink of an eye. Still, it’s important to know this stuff so you have a stronger foundation for when we get into the more technical stuff in later lessons*
2⃣. *Order Types*
Just as the name implies, a market order is an order that is placed immediately at the ‘current market price’. Your broker will give you the best available current price when placing the order. A market order is guaranteed to be executed, however there’s no guarantee on the price at which it’s executed.
_All of the following long or short order types are called pending orders, meaning they are placed in advance with the belief that future price will react a certain way._
*A limit buy order* is an order placed with a broker to buy a certain amount at a given price or better. The order is placed below price when you believe the market will come down to a level and then reverse higher.
*A limit sell order* is an order placed with a broker to sell a certain amount at a given price or better. The order is placed above price when you believe the market will come up to a level and then reverse lower.
*A Buy stop* is an order placed with a broker to buy a certain amount when price surpasses a particular point. The order is placed above price at a point where you believe the market will continue to rise.
*A Sell stop* is an order placed with a broker to sell a certain amount when price surpasses a particular point. The order is placed below price at a point where you believe the market will continue to fall.
*Stop Loss order*
A stop-loss order is an order that is connected to a trade for the purpose of preventing further losses if the price moves beyond a level that you specify. The stop-loss is perhaps the most important order in Forex trading since it gives you the ability to control your risk and limit losses. This order remains in effect until the position is liquidated or you modify or cancel the stop-loss order.
3⃣. *How to calculate profit and loss*
1) The rate for the USD/CHF is currently quoted at 0.9191 / 0.9195. Let’s say we are looking to sell the USD/CHF, this means we will be working with the ‘bid’ price of 0.9191, or the rate at which the market is prepared to buy from you.
2) You then sell 1 standard lot (100,000 units) at 0.9191
3) A couple of days later the price moves to 0.9091 / 0.9095 and you decide to take your profit of 96 pips, but what dollar amount is that??
4) The new quote price for the USD/CHF is 0.9091 / 0.9095. Since you are now closing the trade you are working with the ‘ask’ price since you are going to buy the currency pair to offset the sell order you previously initiated. So, since the ‘ask’ price is now 0.9095, this is the price the market is willing to sell the currency pair to you, or the price that you can buy it back at (since you initially sold it).
5) The difference between the price you sold at (0.9191) and the price you want to buy back at (0.9095) is 0.0096, or 96 pips.
6) Using the formula from above, we now have (.0001 / 0.9095) x 100,000 = $10.99 per pip x 96 pips = $1055.04
Written by Gladys