While the concept of "short-selling" a financial instrument is considered by some to be controversial, it is undoubtedly an integral part of currency trading in the foreign exchange market.
From Andy Krieger's $300 million kiwi short-selling decision in 1987 to George Soros "hacking the Bank of England" and making a cool $1 billion from shorting the pound five years later, history is also full of cases where investors have profited from betting directly against the currency market.
But what exactly does shorting currencies mean and how can you do it as a trader?
What does short selling a currency mean?
Short selling is also known as "shorting" because it refers to the process of betting against the market and selling an asset on the assumption that its price will fall.
This is the opposite of "opening a long position" on a particular currency pair, whereas the profits generated by short selling will depend on the size of your position and the extent to which the price declines over the relevant period.
It is common for traders to go short in a bear market, which is characterised by uncertainty and somewhat higher volatility.
In the aforementioned cases of both Krieger and Soros, the kiwi and pound short selling decisions followed seismic economic and financial market declines, which caused enormous uncertainty and caused sharp fluctuations in currency prices.
How accurately does forex selling work?
Despite the seemingly extreme nature of short selling, it is actually the backbone of the forex trading process.
This is because whenever you trade forex, you open a long position in one currency and simultaneously sell another, creating a scenario where one asset in the pair will need to rise in price relative to the other if you want to make a profit.
If you deliberately short a currency pair, this effectively means that you expect the base currency to weaken relative to the quoted currency.
For example, suppose you decide to short EUR/USD, which is the single most popular currency pair, accounting for over 23% of daily trades.
In this case, you are betting that the EUR will depreciate against the USD, selling the single currency before its expected depreciation.
To begin with, you will be given a real-time bid and ask price (or sell and buy in layman's terms). In this case, the price of EUR/USD could be USD 1.2345 with an offer price of USD 1.2335 and an offer price of USD 1.2355.
To sell the asset, you will subsequently open a leveraged position with a selling price of $1.2335, and if the EUR/USD drops even further from that point, you may make a substantial profit.
However you should also note that taking a short position involves an inherent and palpable set of risks, especially as the EUR/USD (or similar asset) retains an unlimited upside potential over time.
Depending on the scale of your leverage, this could result in sustained and disproportionate losses, so it is important that you mitigate the impact on the market by using appropriate stops and limits through your Exness Login forex trading platform.
Measures to limit your leverage can also help, as this automatically minimises potential losses and helps you protect your capital.
The Final Word
Before you open a short position, you should carefully examine your preferred currency pair, based on fundamental and technical analysis, as well as an understanding of real-time market conditions.
Then take steps to ensure that the trade is compatible with your wider strategy and risk appetite, before setting a leverage value that is not in line with the amount of money you can afford to lose.
At this point, you will be ready to open a short position and potentially make a profit in a depreciating market, following in the footsteps of some of the most successful currency traders in the world.
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