Traditionally, we have all believed that we can only profit from markets whose value will increase. This article will explain how a market’s declining value can be profitable through short selling in forex. 

Short selling refers to borrowing shares and immediately selling them only to buy them back at a lower price. To short a currency, research which forex pair you want to trade in and then analyze. Make sure to know your way around managing the risk of short-selling currency.

You should know how to profit through short-selling in forex and avoid market risks. This article will guide you on how to know your way around shorting.

What Does Shorting a Currency Mean?

Short selling involves betting on a currency’s future value by selling an asset, speculating that its value might go down.

The more the value of the currency drops, the more you profit out of it. This is the opposite of the traditional way of going long, where one assumes the value will increase.

Working with Shorting Forex

Going long on a currency is based on the supposition that one currency will appreciate more than the other. On the other hand, when going short, you are assuming the base currency will weaken. Here, you will be working under a bearish sentiment.

EUR/USD Short Selling

If you speculate that the euro value might depreciate about the dollar, you could go short in the currency exchange. This is because you will need fewer dollars to buy the same amount ($1.1 instead of $1.2).

You can trade with leverage by utilizing derivatives like spread bets and CFDs when trading forex. You will receive a price quote for these financial instruments in a bid and an offer or a possible sell and buy. For instance, the bid and offer for EUR/USD could be $1.2325 and $1.2355, respectively.

If you open the short position at $1.2355 and the value of the Euro falls, you will easily profit from it.

Profit Situation

Suppose you were right to predict that the GBP/USD exchange rate will decline, reaching 1.22015.

You take the five CFD contracts and close your position at the revised “buy” price of 1.2202.

You purchase five CFD contracts at $610,100 to close the trade. Consequently, you would deduct this from your initial investment to determine your profit.

Here: 

$615,050 – (£122,020 per CFD contract x 5 contracts)

$615,050 – $610,100 = $4,950 profit

Loss Situation

Let us assume that your inaccurate prediction of the GBP/USD price decline causes it to increase to 1.24015.

You take the five CFD contracts and close your position at the revised “buy” price of 1.2402.

You purchase five CFD contracts at $620,100 to settle the trade. Consequently, you would deduct this from your initial investment to calculate your loss.

Here:

$615,050 – (£124,020 per CFD contract x 5 contracts)

$615,050 – $620,100 = $5,050 loss

Managing Risks

Short selling comes with many risks, as the asset price could rise anytime—to infinity. This is unlike long selling, where the prices never fall below zero.

The risk can be mitigated in certain ways:

• Be fully aware of the current market trends and stay up-to-date at every point
• Implement stop losses provided by your broker when investing in volatile markets
• Regular access to employ price alerts is a good way to stay informed about your platform.

These are only certain ways to avoid risk, requiring extensive research from the investor.

Benefits of Short Selling

Despite all the risks associated with short selling, it can be very profitable if the right knowledge is applied while trading. With a bearish outlook, you can profit from a falling market.

Short Selling can also be used to hedge your other currency. You can short-sell that currency if you own shares in another country with a weakening currency. This way, you avoid losses through the shares you own there.

Where to Trade?

It is not an easy job deciding where to trade. Choosing your broker is one of the most pivotal steps in forex trading. But don’t worry, we have got you covered!

FXGiants is the best trading platform because it strives to provide you with the best industry services. At FXGiants, you will receive the most transparent legal documents. Our main goal is the customer’s security so that you can trade through them worry-free!

FAQs

What is the limit on short selling?

A short sale is held indefinitely. There is no limit on how long it can be open.

Can there be a ban on short-selling?

Certain governments have banned short-selling, while others have altered it. This is generally done to recover from recent crises.

Why ‘short’ selling?

Imagine that a trader speculates that the euro might weaken in the coming future and buys it at the current rate of $1.2. They borrow 100,000 euros and sell them to another investor. The trader is now ‘short’ of 1,00,000 euros as they sold it to someone.

Is short selling bad for the market?

Short selling is profiting from falling prices. The only fundamental issue is that the losses can be unlimited, unlike when you go long, and the prices cannot go below zero.

Conclusion

Shorting works along the lines of being bearish. It has made a centric presence in the commodity market and is now in the foreign exchange market. You can use financial derivatives and do this without even owning the currency; just sell it. However, you are always bound to risks, so always be sure of the indefinite ends while selling short. Use stops and limits to mitigate your risk exposure and be aware of and updated about market conditions.

DISCLAIMER: This information is not considered investment advice or an investment recommendation, but is instead a marketing communication