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 (the first currency in the pair) and a quote currency (the second currency) in each pair. When you open a long (buy) 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 (selling) a currency pair, you are doing the opposite: you’ll profit if the base currency weakens against the quote currency.
So there are two ways to short the pound:
- sell a pair with the pound as the base currency
- buy a pair with the pound as the quote currency
Let’s use GBP/USD as an example. The price of GBP/USD is 1.1000 (so it costs $1.10 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 1.1000 by more than the spread, you will make a profit.
You can short currency pairs using the spot forex market. These financial products enable you to go long and short on a market, 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
Ready to get started? Open your live IG trading account today. Or, if you want to see how it works in a risk-free environment, try a free demo account to trade with $10,000 in virtual funds.
Example of shorting the pound*
Assume GBP/USD is trading at 1.1000, with a buy price of 1.1001 and a sell price of 1.1000. 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 1.1000.
Selling a 1 lot GBP/USD forex pair is the equivalent of trading £100,000 for $110,000. You decide to sell 3 lots, giving you a total position size of $330,000 (£300,000). Your margin for this trade is around $10,000 (3.33% of the trade value).
GBP/USD falls to 1.0950, and you close your position by buying 3 lots at the new buy price of 1.0950. Your profit would be $1,500 ($330,000 - $328,500).
1.1000 (USD original sell price) * 3 (lot size) * 100,000 (unit) - 1.0950 (USD buy price) * 3 (lot size) * 100,000 (unit) = $1,500
On the other hand, GBP/USD rises to 1.1050, and you close your position by buying 3 lots at the new buy price of 1.1050. Your loss would be $1,500 ($330,000 - $331,500).
1.1000 (USD original sell price) * 3 (lot size) * 100,000 (unit) - 1.1050 (USD buy price) * 3 (lot size) * 100,000 (unit) = -$1,500
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. Using spot forex markets, 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.
What factors influence the price of the pound?
A country's currency is affected by how easily and freely it can be traded and the demand and supply of the currency. This is determined by a number of factors, in the case of the pound including:
The UK's economic performance and outlook
The economic performance and outlook of a country is mainly determined by its gross domestic product (GDP) – a proxy for the size and health of a country’s economy, usually measured over a quarter or a year, as well as its consumer price index (CPI) and producer price index (PPI), on a monthly and yearly basis.
CPI is a measure of the average change over time in the prices paid by urban consumers for a basket of consumer good and services. PPI measures the average movements of prices received by domestic producers for goods and services sold on the domestic and/or on export markets over a given time period.
Interest rate expectations in the UK
Interest rates in the UK are set by the Bank of England. Interest rates play a major role in that, all things being equal, the currency of a country with higher interest rates - or anticipated higher interest rates - tends to rise against currencies of countries with lower interest rates.
The reason for this is because speculators and businesses will buy the higher interest currency and invest in its country in order to receive the higher interest. This is known as a carry trade.
These factors determine whether businesses, speculators and investors want to buy the pound (demand) or sell it (supply). Investors and businesses compare this fundamental data country by country and, importantly, look at their future expectations before deciding which currencies to invest in.
*Prices are exemplary and not an indication of actual trading profits/losses
This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Any research provided should be considered as promotional and was prepared in accordance with CFTC 1.71 and designed to promote the independence of investment research. See our Summary Conflicts Policy, available on our website.
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