Net Short or Net Oversold Position
Here, currency outflows exceed inflows, that is, sales exceed purchases.
Square or Flat Position
No net position exists – currency inflows equal outflows.
Open & Square Positions: Making a Profit
The trader opens a position at one price and later closes it or squares it at a better price. This process of buying at one price and closing out at another price demands a number of considerations for a trader at a financial institution.
The questions a trader may ask themselves include:
- At what price do I establish the position?
- When do I establish the position?
- What factors affect my decision to trade at a particular time and rate?
- At what price do I square the position?
- When do I square the position?
- What factors affect my decision to square at a particular time?
- What is my maximum authorized loss?
- What are my trading limits?
A trader will be trained to manage these skills by developing a knowledge of the market and through experience understand its behavior sufficiently to enable a profit to be made from exchange rate movements.
Open & Square Positions: Example
Let’s look at an example showing how a position can be opened and closed by an FX trader (price taker) trading the euro against USD.
John thinks the value of the EUR is going to increase.
He wants to establish a long EUR 20 million position at 1.3798.
On his trading screen, the rate of 1.3798 has just become available from one particular market maker.
He enters EUR 20 million in the amount box and clicks on the offer price of 1.3798.
His position is now long EUR 20 million at 1.3798. This means that he is effectively short USD 27,596,000 at this rate (20 million x 1.3798).
Let’s assume that after a period of time the price has risen. John decides to take his profits.
He clicks on the bid price of 1.3805 and sells EUR 20 million at 1.3805 to the market maker. John’s EUR position is now square.
All trading systems have what is known as a “blotter”.
This is a permanent record of all trades made together with prices and information about what has been bought and sold.
John’s blotter shows a profit of USD 14,000 on the trade.
If the price had fallen below 1.3798, it would show a loss.
Position Control: Trading Limits