Long Short Strategies in Forex Markets

In Forex markets a long/short strategy is used to maximise traders’ profits, from both the rise and fall of exchage rates. The reason why it was created is that such a strategy is more profitable than the simple ‘buy and hold’, or ‘just go long’ strategies, according to which asset managers do not take short positions and therefore cannot benefit from both rising and falling prices.

In long/short strategies, traders look to buy currencies they expect to rise, while selling short those they expect to fall. If the move is right, the strategy’s return is higher than that of other strategies, achieving also the target of portfolio diversification.

Of course, it is fair to say that long/short strategies could end in significant losses for traders, which could exceed the principal amount invested.

Long/short strategies may benefit a trader in two ways. First, the trader has a variety of investing solutions. Second, unlike traditional ‘buy and hold’ strategies, which have 100% exposure to the market, long/short strategies provide traders with the possibility to shift their balance of long and short positions to alter their sensitivity to market movements.

Investment giant Blackrock suggests that one way to fund an allocation to a long/short strategy is to consider reducing exposure to other funds that hold the same asset class, in order to obtain a more diverse, less volatile portfolio. This suggestion holds also in Forex markets.



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