3.3 Directional Warfare: Going Long and Going Short

In traditional stock markets or real estate, you generally only make money when the value of the asset goes UP. If the housing market crashes, you lose value. Forex is entirely different. Because it is a two-way derivative market, you can make just as much money when the market is collapsing as when it is rising.

This is the concept everyone understands. 'Buy low, sell high.' If you look at the EUR/USD chart and your technical analysis tells you that the Euro is about to get stronger against the Dollar, you click 'Buy' (also known as Going Long). If the price graph moves upwards, you are in profit.

This concept confuses almost all beginners. How can you sell something you don't even own yet? How do you make money when the price graph is dropping? Let's use an analogy to make it crystal clear.

Imagine your friend owns a Toyota Axio, and the current market value is KES 1,000,000. You analyze the car market and realize a massive shipment of cheaper Axios is arriving next week, which will crash the price.

1. You borrow the Axio from your friend today and immediately sell it to a stranger for KES 1,000,000. You now have 1 Million Shillings in your pocket, but you owe your friend one Axio.
2. Next week, the market crashes as you predicted. The exact same model of Axio is now selling for KES 800,000.
3. You take KES 800,000 from your pocket and buy an Axio.
4. You return the Axio to your friend (closing the trade).
5. You are left with KES 200,000 in pure profit, simply because the price went DOWN.

When you click 'Sell' (Going Short) on MetaTrader, the broker's software automatically handles this exact borrowing and selling process in milliseconds. You don't have to literally borrow currency; the broker executes it digitally. If the chart drops, you make money. If the chart goes up, you lose money.

When you execute a trade, you will notice there are always two prices on the screen:
- The Ask Price: The price at which you can Buy (Go Long).
- The Bid Price: The price at which you can Sell (Go Short).

The difference between these two prices is The Spread. The Spread is the broker's fee. This is why every single trade you ever open starts slightly in the negative (in the red). The market must move past the spread distance before you enter true profit.