What Is a Forex Position?

Position is a term often heard in the financial market. In the Forex market, position is also called Forex holdings. So what exactly is a Forex position? Let’s introduce it to you.

Forex position - refers to the balance of various foreign currency accounts held by Forex banks, that is, the balance of Forex transactions in Forex banks. When the Forex bank buys more Forex than it sells, the Forex position becomes long (Long Position), also known as overbought; when the Forex bought and sold by the Forex bank is equal, the Forex position is balanced, which is called flattening or flat (Square). Position); when the Forex purchased by a Forex bank is less than the Forex sold, the Forex position is short or short (Short). Position), also known as oversold. The net balance calculated by adding up the various foreign currencies held by Forex banks with various maturities is called the overall position.

Form of Forex position

There are three situations for Forex holdings:

(1) "Oversold Positon" when the total amount of Forex sales exceeds the total amount of purchases;

(2) The opposite situation of "overbought hold" (Overbovght Positon);

(3) "Savare Positon" in which the total amount of purchases and sales is approximately equal.

The first two will cause Forex banks to be favorably or unfavorably affected by exchange rate changes. In order to avoid the risk of exchange rate changes, Forex banks must conduct Forex transactions with other Forex banks, that is, buy when "oversold and held" and sell when "overbought and held", so that the Forex holdings can equalize the difference (Savare) as much as possible.

Methods for managing Forex position limits

Methods for managing Forex position limits: Loss control method

That is the method by which banks prevent Forex risks by setting stop-loss point limits for Forex transactions.

The stop-loss limit (Cut-LossLimit) is the bank's maximum tolerance for losses caused by Forex risk. When the market exchange rate changes in an unfavorable direction, once the loss reaches the stop loss limit, traders should cut off their positions regardless of the reason to avoid greater losses.

The stop loss limit can be divided into two parts:

First, the stop loss point limit of the Forex capital department,

This is suitable for businesses such as spot Forex transactions, forward Forex transactions and swap Forex transactions. The stop loss point limit can be calculated as a percentage of the open position, or it can be determined based on the loss of daily or monthly Forex transactions not exceeding a certain amount;

The second is the stop loss limit for Forex traders, which is usually calculated based on the percentage of the loss to the transaction volume. For example, it is stipulated that the loss amount of each transaction shall not exceed 1% of the transaction volume, etc. Obviously, the greater the percentage, the greater the amount of loss tolerated. Of course, different Forex traders have different stop loss limits.

Method for managing Forex position limits: Position limit method

That is the method by which banks prevent Forex risks by setting limits on Forex trading positions.

When banks set trading position limits, they should consider the following factors:

First, the bank’s position in the Forex market, that is, whether the bank is a market leader, a market active player, or a general participant in the Forex market;

Second, the bank’s top leadership’s expectations for Forex business returns and their tolerance for Forex risks;

Third, the overall quality of the bank’s Forex trading personnel;

Fourth, the type of transaction currency.