In forex trading the term ‘Bag’ may seem odd, but it is rather quite relevant. In other words, a ‘Bag’ is defined simply as a set of trades or positions that a trader is long.

Types of Bags

1. Long Bag: This means that a trader has too many trades or positions which are mostly longs. Going ‘long’ means buying a currency hoping its price will go up. So, if someone has a ‘Long Bag,’ they think the currency will get more valuable.
2. Short Bag: On the other hand, a ‘Short Bag’ is a situation whereby a trader has a majority of short stakes. A ‘short’ position is when you sell a currency you don’t own, hoping its price will drop so you can buy it back cheaper. Shorting is when you sell something you don’t have, hoping to buy it back cheaper later.

Examples of Bags

• Example of a Long: Think of yourself as a forex trader who thinks that shortly, the euro will be stronger than the dollar. You call your broker to Purchase several different euro-related trades. You’re holding a lot of euros and want them to be worth more than dollars.
• Example of a Short: Now, let’s imagine you contemplate the possibility which is that the British pound will likely drop with the yen. Some of the positions you sell are in pounds. You collect these trades and come up with a ‘Short Bag.’ You’re betting the pound will drop against the yen so you can buy it back for less.

Implications for Traders

Sometimes, longing means you think prices will go up and feel good about it. However, if the markets turn against you then it could prove to be a very costly mistake. A “Short Bag” is when you expect prices to drop, but it’s bad if they go up instead.