Forex vs other markets
The concept of going long and short is slightly different for forex markets when compared to other markets. For stocks, bonds, and commodities, when you go long or buy, you are doing so in a specific currency. Usually, this will be the local currency, or for global markets like gold or copper, it will be in US Dollars. It’s exactly like buying a car, mobile phone or meal, except that you are doing so because you think the price will rise and not to use or consume the product. In most cases, there is only one price you are looking at and you expect that price to rise.
You can also go short of equities, bonds, and commodities if you believe the price will fall. However, going short is slightly different, because you can’t sell something you don’t own. To sell one of those instruments short, you must first borrow the same quantity that you want to sell short. In return, you pay the lender a fee, much like an interest rate. You now have a short position, but you owe the stock to the lender – this is why it’s known as being short. When you cover your short, you give the stocks or bonds back to the lender, and you then have a flat position
CFDs (contracts for difference) and futures are slightly different. Because they are just contracts, there is no actual asset to hold or borrow. You will still have a long or short position, but you don’t have to borrow contracts to sell them short.
Now we come to the forex market. Currencies are priced in other currencies. You can buy USD priced in EUR, JPY, AUD or almost any other currency, and in each case, the price will be different. The other difference is that you can never just go long of one currency without also going short of the currency it is priced in.
If you are long USD/EUR, you have a long position in USD and a short position in EUR. You will make a profit if the USD goes up more than the EUR, or if the EUR goes down more than USD.
In the case of currencies, you don’t have to borrow, because you own one asset and you are pricing it using the second asset. So, although you are short the second asset, you don’t need to borrow it to sell it short.