One of the concepts that many new traders struggle with when they first start, is the issue of trading both sides of the market. In other words, making money when the market goes up, and also when it goes down. I can assure you when I first started, I couldn’t understand this concept. After all, we are all familiar with the principle of buying something at one price, which then increases in value, and we then sell at a higher price for a profit. This is generally what happens in the world of business! Many of us come into the trading world with some knowledge of stocks and shares, and here again, we are all familiar with buying a stock at a low price, and then waiting for the price to go up, before selling at a profit.
However, in trading, we can also make money when the market falls, and this is what I mean by trading both sides of the market, and I’ll explain why it is so important in a minute. In this case, we are selling something we do not own, which we then buy back at a lower price, and make a profit. Yes, it is a strange concept when you think about it, but this is what we are in fact doing. If we think that a currency pair is going to fall in price, then we sell it, and when we believe it is about to move higher again, then we buy it back. If you think about this logically, then this is simply the reverse process of what we are doing when buying and then selling. When a currency pair is moving higher we buy first, and then sell to close the position. When a currency pair is moving lower, we
sell first and then buy to close this position. Exactly the same process, but simply in reverse!
When we buy it’s called a long position, and when we sell it’s called a short position.
Now, why is it important to trade both ‘sides’ of the market, the long side and the short side?
Well first, and perhaps most obviously this allows you to take advantage of price moves in either direction. After all, if you only traded in one direction all the time, this would be very limiting, and really reduce your trading ‘horizon’ dramatically. In other words, you would rule out 50% of the price action. However, there is a more subtle and far more dangerous aspect to taking a one sided view of the market, and it is this. If you only ever trade in one direction, then you will always be looking for market opportunities in this direction, and none other. In other words, your mind will be influenced by what you want to see, and not necessarily by what is happening in front of you, on your screen. Your mind will start to play tricks on you, and tell you that a market is going in the direction you want to trade. This is fatal, and you are in effect trading ‘with an opinion’ as you want to see the currency pair move in your ‘preferred’ direction.
Now there is also another reason that you must learn to trade both sides of the market, and it is this. All markets go up in stairs, and down in escalators. In other words, up relatively slowly, but down very quickly, and the forex market is no exception. You will make money far more quickly in a falling market, than in a rising one. Equally, if you are on the wrong side of the market when it falls, then losses can mount up fast too, something we will cover later in the chapter. The first point is this - you must learn to trade on both sides of the market, without an opinion. If you see a currency pair rising, and you have done your analysis, then you buy to enter a long position. If you see a currency pair falling, and your analysis confirms a good low risk trading opportunity, then you enter the market with a sell order to open a short position. It’s important to develop this approach so you do not have a bias, one way or the other. Simply take a long or short position with equal confidence, and based on your analysis of the market. I cannot stress how important this is, and indeed you may find that once you begin trading, that you do develop a bias to one side or the other. This is easy to check on your trading statement. If so, be careful! This can be dangerous as you will begin to see trading opportunities in your ‘ direction of
bias’, so do watch out for this as you begin your trading journey. Finally, and just to use the correct terminology, when you speak to your broker, when you have a ‘live trade’ in the market, it is called a ‘position’ in the market. Your broker will then understand what you mean! Now let’s move on to look at two of the most mis-understood terms, leverage and margin.