Going long is an expression used almost exclusively by stock traders, which means you are “buying” shares of a company. In the foreign exchange market, the term means something slightly different. It refers to taking a position on the appreciation or depreciation of one currency against another. The trader assumes that the value of the first currency will increase relative to the other upon reaching a certain price, giving him an advantage compared to holding cash.
The trader could be right or wrong, though. If he was expecting, for example, to buy EUR/USD at 1.3500 and it actually reached that level but then dropped down again, then he would have lost money overall because if he had just held onto his cash, he would have still had all of it after the price dropped. This risk can be reduced by using a stop-loss order.
You do not buy or sell currency at a market price like you might with stocks when you trade forex. You take an outright position, known as the entry rate, which will determine whether your trade is profitable or not in the future. For example, let’s say you have EUR/USD trading at 1.3500 and go “long” by opening up a position for 1 lot (100k). To calculate what your initial margin requirement is, multiply 100,000 * 20% = 20,000 USD. When placing this short EUR/USD position, the asking rate was 1.3630, so you would have made 30 pips.
The EUR/USD then rose to 1.3700, resulting in 80 pips of profit for your account (1.37 – 1.35 = 0.02 * lot size). At this point, if you closed the position, you would make a net of 70 pips of profit (80 – 20 = 60), although remember that there are fees on both sides of the trade which will lower your actual gain, depending on the forex broker.
But what would happen if it dropped to 1.3400 during that time instead? You would be required to deposit more margin money into your account because at that rate, and you are losing money even though it hasn’t reached -100 yet, the maximum amount of money you can lose. This additional margin is known as the maintenance requirement.
If EUR/USD reached 1.3300, your account would be made negative by 20 pips (1.34 – 1.33 = 0.01 * lot size). You would then need to deposit an additional USD 4000 into your account to maintain your position because it actually went further than -100 pips (-120 in this case), so if you didn’t deposit more cash, your account would be automatically closed out, and you’d lose everything. The aforementioned example assumes perfect foresight, which is impossible even for professional traders; therefore, stop-loss orders are highly recommended when trading forex online.
When closing a position, the trader is selling his currency and buying an opposing one. This will result in him having to sell at a lower price (because he is selling high and buying low) than what he actually bought, which will lower his profit margin.
Every forex broker has its calculators that you can use to find out your profit or loss potential as well as margin requirements on any given trade. All of this information such as interest rates, dividends, etc., including foreign exchange rates, can be found with tools like Google Finance.”
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How does forex trading differ from stock trading?
Going long in the forex market refers to opening a trade for buying one currency and selling another simultaneously, which is done with the expectation that the first currency will become more valuable upon reaching a certain rate. In stock trading, you buy shares of a company and hope that it becomes more valuable than just holding cash.
The risk involved when going long can be lessened by placing stop-loss orders.
When you trade forex online, your position cannot change instantly like with stocks because there’s no “market price” where every asset is bought or sold at once; therefore, if your assets are not traded simultaneously, any subsequent trades would cause your profits or losses from previous trades to change as well as possibly be subject to fees.
Interest rates and foreign exchange rates are found with tools like Google Finance.
How do I calculate my initial margin requirement?
To calculate the initial margin (required money) for a given trade, it’s done by multiplying your lot size by your chosen percentage of risk: 20% for most traders. This is because you only deposit the required amount to keep your position open rather than closing it out at a market price. The asking rate is used as the current price for this calculation, and funds deposited in case of an unfavorable change go towards future profits or losses instead of getting refunded. You can also refer to online calculators such as those provided by OANDA.com.
What happens if the market goes against me?
This is where stop-loss orders come in. For example, if you own USD 10,000 and buy EUR/USD at 1.3400, then place a stop-loss sell order at 1.3390 to protect your position against losses should the market drop rapidly in the next few hours. Your negative margin (i.e., how much money has been lost) will change depending on what happens with the exchange rate during that time. You can also lose money due to fees; therefore, it’s best not to place trades manually but use tools like OANDA’s Forex trading platform instead. These tools are usually available with most forex brokers for free or with a small fee, though some require an initial deposit before use.
How do I place stop-loss orders?
Stop-loss orders are set in advance in case the market immediately changes after the trade has been placed; when this happens, the sell order is executed at a price that is usually lower than what was originally bought to make room for loss. This is because you only deposit the required amount to keep your position open rather than closing it out at a market price. The asking rate is used as the current price for this calculation, and funds deposited in case of an unfavorable change go towards future profits or losses instead of getting refunded. Some brokers, however, do not allow stop-loss orders on currency pairs that can be traded with maximum leverage (maximum 1:500), so check out your broker’s rules for more information.
What happens if the market goes in my favor?
In this situation, your account balance might increase depending on the size of your lot and what you deposited initially. This can be profitable if you have a lot that is larger than required for that trade. If you have a smaller lot, then gains will only equal to the amount deposited into your trading account because these deposits are not refunded except when withdrawing money from Forex accounts; it’s also common practice to leave a small number of funds in a forex account just in case a sudden drop occurs.
In conclusion, going long means investing in or buying assets, which increases the asset’s price. This happens when you use margin leverage to go long; it works the same way with short selling (borrowing money to short-sell, decreasing an asset’s price).