Breaking Down the Forex Positions

The foreign exchange market or the forex is where currency is simultaneously traded. As with any field, the currency market also has its own terminologies. The term "position" is one of the most commonly used words in the money market. It's quite easy to understand really, what it means depends largely on how it's used rather than what it actually means on its own.

Standing alone, the word "position" pertains to the net currency holdings a trader has. Obviously when it's attached to another word it'll pertain to where net currency holdings are at a point in a transaction. This is the first word that would indicate an entry to the forex, as well as the reflection to a change in the net currency holdings as trades are executed.

When you enter into the money market, the first thing you'd do is either buy or sell one currency against another. You'd be making a position or taking a position. Subsequently, you'll execute trades and your initial position will change. When you order a sale, you'll be in a short position. When you order a purchase, you'll be in a long position. These situations are also called open positions where your holdings are affected by market movement.

The "long" and "short" of it are normally used concerning the first currency in a currency pair. For example, when you buy the currency pair US dollars/Swiss francs your trade will simultaneously affect both currencies. You're actually buying US dollars and selling Swiss francs. Your US dollar holdings will increase and Swiss franc holdings decrease, placing you in the long position.

On the other hand, when you sell the same currency pair, you're actually selling US dollars and buying Swiss francs. Your US dollar holdings will decrease and Swiss franc holdings increase, placing you in a short position.

Another forex status is called a square position. Basically it pertains to an even situation where you're neither in the long position nor in the short position. That's when you don't have an open position and market movements have no affect on your net currency holdings.

Simplifying the matter of forex positions, we can say that when you initially enter into the forex you are making or taking a position that's open to trade. Afterwards, when you sell currencies you are taking a short position. When you buy currencies you are taking a long position. But when you're still feeling out the market and you intend to wait, you can take a square position by leveling out your purchases and sales. Whether you're long, short, open or square, the forex positions will always pertain to the status of your net currency holdings in the foreign exchange market.