How to short the pound
Fluctuations are a certainty in the forex market – but this can be a good thing, as you can make a profit even when a currency declines in value. In this article, you’ll learn how to short the pound and benefit if it depreciates.
What does shorting the pound mean?
Shorting (or ‘selling’) the pound means taking a position that will earn you a profit if the value of the pound goes down in relation to other currencies. Selling is the opposite of going long (buying), which means taking a position that makes profit if the pound’s market price increases.
Forex is traded in pairs, with a base currency and a quote currency in each pair. When you open a long position, you are in effect buying the base currency and selling the quote. If the base strengthens against the quote, you make a profit. When shorting a currency pair, you are doing the opposite: you’ll profit if the base currency weakens against the quote currency. In other words, one method of shorting the pound is to sell a pair with it as the base currency.
Let’s use GBP/USD as an example. The price of GBP/USD is 1.22075 (so it costs $1.22 to buy £1) and you think GBP is going to decrease in value against USD – so you open a short position. If the price quote drops below 1.22075 by more than the spread, you will make a profit.
You can short currency pairs using derivatives such as spread bets and CFDs. These financial products enable you to go long and short on a market without owning the underlying assets. And, you only have to put up a small deposit (margin) to open your position. Note that trading on margin could magnify your profits, as well as your losses.
How to short the pound
- Research the forex pair you want to trade, for example GBP/USD
- Carry out analysis on that forex pair, choose a forex trading strategy and create a risk management plan
- Create an IG account or log in to your existing account
- Open your first position: click on ‘sell’ if GBP is the base currency or ‘buy’ if it’s the quote
Example of shorting the pound
Assume GBP/USD is trading at 1.22075, with a buy price of 1.22080 and a sell price of 1.22070. You think that the pound is set to lose value against the US dollar, so you decide to sell (go short on) GBP/USD at 1.22070.
Selling a single standard GBP/USD CFD is the equivalent of trading £100,000 for $122,070. You decide to sell three CFDs, giving you a total position size of $366,210 (£300,000). Your margin for this trade is $12,194.79 (3.33% of the trade value).
GBP/USD falls to 1.21420, and you close your position by buying three contracts at the new buy price of 1.21425. Your profit would be $1935 ($366,210 - $364,275).
1.22070 (USD original sell price) * 3 (contract) * 100,000 (unit) - 1.21425 (USD buy price) * 3 (contract) * 100,000 (unit) = $1935
Which currencies can you sell the pound against?
There are many currencies that you can sell the pound against, including USD, EUR, AUD and NZD. Or, using CFDs or spread betting, you can go long or short on any currency pair involving the pound.
Each currency pair is different and will be affected by different factors – it all depends on the countries involved. For example, GBP/USD will be affected by political events in both the UK and the US, such as Brexit or the US elections. Some forex pairs move in wider bands than others, which is why it’s important for traders to research both sides of the pair.
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