The fact that currencies are traded in pairs differentiates the foreign exchange market from other fi nancial markets in important ways, one of which is the concept of long and short.
In trading equities, for example, a “ long ” entry is simply the process of buying shares in a specific security in the hope that it will go up in value. Conversely, a “ short ” entry is to sell shares before actually owning them. This is with the understanding that the shares must be bought back or “ covered ” at a later date, hopefully for a profit if the stock goes down. Consequently, if traders believe that a stock will go up, they will enter the trade “ long. ” If, on the other hand, they think it will go down in price, they will sell “ short. ” The foreign exchange market, in contrast, treats long and short in a significantly different manner. To be long EUR/USD, for example, is to simultaneously buy euro and sell dollar. To be short EUR/USD, on the other hand, is to simultaneously sell euro and buy dollar. So whether one is long or short any given currency pair, one is always long one of the currencies in the pair, and short the other.
This concept may seem foreign to traders used to dealing with stocks and/or futures, but it essentially means that no matter what position a trader takes in the currency markets, that trader is always both bullish (financially optimistic) on one currency while simultaneously bearish (financially pessimistic) on another. Now that the structure of currency pairs has been established, the all - important topics of order type and trade placement can be discussed.
