What is a Long Position in Forex Trading?

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A long position in a security indicates long-term ownership. Investors hold long holdings in securities with the hope that the stock's value will increase in the future. An investor who holds a long (buy) position anticipates a price increase. A price increase will benefit a long-position investor. Buying stocks is usually an investment in long-term stock assets.

Let’s look at what it means to hold a long position in the forex market.

What is a Long Position?

Investors have the opportunity to establish long positions in various securities like stocks, mutual funds, currencies, and derivatives such as options and futures. Believing in the potential for growth and holding a long position is a positive perspective. Long positions are the opposite of short positions.

People commonly use the term "long position" when purchasing an options contract. A trader has the option of holding either a long call or a long put option, depending on their outlook for the option contract's underlying asset.

For instance, an investor looking to profit from a rise in asset prices will choose to "go long" on a call option. The call provides the holder with the opportunity to purchase the underlying asset at a specified price. Investors who anticipate a decline in an asset's price, on the other hand, will hold a put option, giving them the ability to sell the asset at a specific price.

Types of Long Positions

Actually, depending on the context, the term "long" in investing can have various meanings. Typically, the term "long" signifies the length of time one holds an investment. Nevertheless, the term "long" takes on a distinct definition within options and futures contracts.

Long Futures Contracts

Investors and businesses have the option to enter into a long-forward or futures contract as a means of safeguarding against unfavourable price fluctuations. Companies have the option to use a long hedge to secure a fixed purchase price for a commodity required at a later date.

There is a distinction between futures and options, as the holder is required to either purchase or sell the underlying asset. They have no choice but to complete these actions.

Suppose a jewellery manufacturer has a strong belief that the price of gold will increase in the near future. As a quantitative analyst, the firm has the option to engage in a long futures contract with its gold supplier, allowing them to acquire gold from the supplier at a fixed price of $1,300 in three months.

Within a span of three months, regardless of whether the price surpasses or falls below $1,300, the company with a long position on gold futures is required to acquire the gold from the supplier at the predetermined contract price of $1,300. The supplier, on the other hand, must deliver the physical commodity upon the contract's expiration. Speculators also take bullish positions on futures contracts when they anticipate price increases. Their sole focus is on capitalizing on price movement, with no interest in acquiring the physical commodity. A speculator who has a long futures contract has the option to sell it on the market prior to expiration.

Long Position Holding an Investment

Investing in stocks or bonds for the long term is a common practice in the capital markets, particularly among retail investors. When an investor makes a long-position investment, they buy an asset with the belief that its price will increase. This investor typically has no intention of selling the security in the near future. When it comes to holding equities, there is a connection between the term "long" and both the measurement of time and a bullish intent.

Adopting a long-term perspective on asset appreciation, the buy and hold strategy relieves investors from the burden of constantly monitoring or timing the market, providing them with the opportunity to endure the inevitable fluctuations. Additionally, historical data supports the fact that the stock market tends to increase in value over time.

Certainly, there may be significant drops in the portfolio that can be extremely detrimental, especially if they happen just before an investor's planned retirement or when they need to sell their assets. A prolonged bear market can pose challenges, as it tends to benefit short-sellers and individuals who anticipate declines.

Similar to a quantitative analyst, investing in outright ownership entails a substantial commitment of capital, potentially leading to missed opportunities. 

Long Position Options Contracts

When it comes to options contracts, a long position is advantageous when the price of the underlying security increases. These involve taking positions in long calls or short puts.

When a trader purchases or maintains a call options contract from an options writer, they are considered to be in a favourable position, as they have the ability to buy the underlying asset. An investor purchases a call option, anticipating a rise in the value of the underlying security. The individual holding a long position call believes that the asset's value is increasing and may choose to exercise their option to purchase it before the expiration date.

However, not every trader who holds a long position is convinced that the asset's value will rise. If a trader believes that the value of the underlying asset in their portfolio will decrease, they have the option to purchase a put option contract.

They maintain a long position because they possess the capability to sell the underlying asset in their portfolio. An individual with a long-term option anticipates a decline in the price of an asset. They hold the option with the expectation that they will be able to sell the underlying asset at a favourable price by the expiry date.

As is obvious, the position on an options contract can indicate either a bullish or bearish sentiment, depending on whether it is a put or a call.

The short position on an options contract, on the other hand, entails borrowing the stock or underlying asset with the intention of selling it and later buying it back at a lower price.

Example of a Long Position

For instance, imagine a trader who anticipates a rise in the price of Microsoft Corporation (MSFT) and decides to buy 100 shares for his portfolio. The trader currently holds 100 shares of MSFT.

Now, let's take a look at a Nov. 17 call option on Microsoft (MSFT) with a $75 strike price and $1.30 premium. If the trader remains optimistic about the stock, they might consider buying an MSFT call option instead of purchasing the shares directly.

The trader will exercise their right to purchase 100 shares of MSFT at $75 using their long option if the stock is trading above the strike price and the premium paid at expiry. The trader obligates the seller of the purchased options contract to sell 100 shares at a price of $75.Investors who take a long position don't always anticipate profiting from a rise in the asset or security's price. If the security price goes down, the investor can make a profit with a put option.

Imagine another investor who currently holds 100 shares of MSFT in their portfolio, but now has a negative outlook on it. He decides to take a long stance on the one-put option. The current price of the put option is $2.15, with a strike price of $75 and an expiration date of Nov. 17.

If the value of MSFT drops below the strike price ($75 minus $2.15) on the expiration date, the investor will opt to exercise the long put option. This allows them to sell their 100 MSFT shares for the strike price of $75. It's important to note that in this scenario, the option writer is obligated to buy the shares at the agreed-upon price of $75, regardless of their current market value.

Pros and cons of open positions

Pros

The stock market and individual stocks tend to increase over time. Historically, long positions are likely to make money, but it’s important to note that past performance does not guarantee future results

Dovetail with historic market performance

Limits losses

Long positions can also contribute to additional investor rights in a company

An investor that buys and holds a security for one year will pay lower taxes on profits upon reselling

Cons

Suffers in abrupt price changes/short-term moves

May expire before advantage is realized

Long positions will require you to lock up your funds for an extended period, implying a liquidity risk

A long position doesn’t guarantee success, so an investor’s long position may expire before realizing profits

Conclusion

Every available position comes with its own set of risks and opportunities. Understanding, overseeing, and ultimately capitalising on your open positions is crucial as you navigate the trading industry. In other words, when you close a position in the market, you are essentially taking on the opposite position and nullifying an existing one.

This would require selling the securities in a long position and then repurchasing them through a short sale. Usually, a trader initiates the closing transaction, but brokerage houses may occasionally mandate it if specific conditions are satisfied.

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