The basic idea behind trading gold on Forex market is to earn as much profit as possible within as short a time frame as possible. The market values of currencies keep on fluctuating in the Forex market. There is an anticipation factor behind trading gold on the Forex market.
If a Forex trader believes that the value of the currency pair is about to rise, he or she may buy the currency pair. On the other hand, if the trader believes that the currency value is about to fall, he or she may sell the currency pair.
Trading Gold in Forex Market using Long and Short Positions
In Forex trading parlance, the above two situations are called holding long and short positions. When a Forex trader buys a currency pair with the intention to sell the currency pair as it rises in value, it is called holding a long position. Contrarily, when a Forex trader borrows a currency pair from the Forex broker and sells it on the Forex market with the intention to buy the currency pair back as it falls in value, it is called holding a short position.
Here we will provide in depth information on the two types of Forex trading to profit in Forex trade.
Long Position
A trader holds a long position when he or she feels that the currency prices are expected to rise in either a short or long duration. A long position is held until the currency pair value rises according to expectations resulting in profit for the Forex broker.
Holding a long position means the trader buys the base currency pair in exchange for the quote currency pair. The trader holds this position until the value of the currency pair rises.
When the currency pair actually rises according to expectations, the trader will close the trade by selling base currency pair in exchange for quote currency pair.
A simple example can help in understanding this concept. Suppose the trader wants to trade in XAU/USD currency pair. XAU is the base currency pair while USD is the quote currency pair. Now suppose the currency pair is trading at 1,310.0508. If the trader believes the currency trade will rise in value, he or she will buy currency pair. Buying this currency pair means that the trader buys the base currency pair (XAU) in exchange for quote currency pair (USD).
Now again suppose that the currency pair value has risen from 1310.0508 to 1310.0600, an increase of 92 pips. If the trader sells the currency pair at this moment, he or she will gain from the trade. Selling this currency pair means that the trader sells the base currency pair (XAU) in exchange for quote currency pair (USD) and thus profit from the trade.
In this way, the trader gains from holding long position in XAU/USD currency pair by buying cheap and selling it at higher price when currency value rises.
Short Position
Short position is exactly opposite to holding the long position. A trader holds a short position when he or she feels that the currency pair value is about to fall either in the short or long duration. A short position is held until the currency pair value falls according to expectations resulting in profits from the trade.
Holding a short position means the trader sells the base currency pair in exchange for the quote currency pair. The trader holds this position until the value of the currency pair falls.
When the currency pair actually falls according to expectations, the trader will close the trade by buying back base currency pair in exchange for quote currency pair.
Another example can help in understanding this concept. Again, suppose the trader wants to trade in XAU/USD currency pair. If the trader believes the currency trade will fall in value, he or she will borrow the currency pair from the online Forex broker and sell currency pair in the Forex market. Selling this currency pair means that the trader sells the base currency pair (XAU) in exchange for quote currency pair (USD).
Now suppose that the currency pair value has fallen by 92 pips. If the trader buys the currency pair at this moment, he or she will gain from the trade. Buying this currency pair means that the trader buys the base currency pair (XAU) in exchange for quote currency pair (USD) and thus profit from the trade.
In this way, the trader gains from holding short position of XAU/USD currency pair by selling at higher price but buying at lower price when currency value falls.
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