Learn how to short a currency
A trader would short a currency if they believed that it was going to fall in value, which could happen for a number of reasons. Read on to find out more about shorting, including how to short a currency and some examples.
What does it mean to go short on a currency?
Going short, or short-selling, means that you are betting against the market. In this scenario, you are selling an asset on the assumption that its price will fall, and the more the price falls, the greater your profit.
Going short is the opposite of going long, where you anticipate the market will rise and would open a buy position. Typically, traders open a short position in a bearish market, and they open a long position in a bullish market.
How does forex shorting work?
Shorting currencies is an inherent part of forex trading. This is because when you trade forex, you are going long on one currency while you are simultaneously selling another. As a result, when you trade forex pairs, you are actually making a bet that one currency in the pair will appreciate in value relative to the other, or vice versa.
If you went short on a currency pair, it means that you expect the base currency to weaken against the quote currency. All currency pairs have a base currency and a quote, with the cost of the pair being how much of the quote currency you would have to sell in order to buy one of the base.
In the image below, you would go short on the EUR/USD currency pair if you believed that the euro would depreciate relative to the dollar, meaning it would cost fewer dollars to buy one euro – perhaps $1.1000 instead of the current $1.2000.
In doing so, you would effectively be selling euros in the expectation that they would decrease in value over time.
How to short a currency
The five following simple steps will help you to short a currency:
- Research which forex pair you want to trade
- Carry out analysis on that forex pair, both technical and fundamental
- Choose a forex trading strategy and check you’re comfortable with your exposure to risk
- Create an IG account and deposit funds (Create live account)
- Open, monitor and close your first position
Research which forex pair you want to trade
Researching the different forex pairs available to you means that you will be better informed on which pairs are the most volatile or have the most liquidity.
These two factors can be crucial for traders, with those with a higher appetite for risk choosing pairs that are more volatile; or those that are after quick opportunities for profit – such as scalpers – choosing the pairs with higher liquidity.
Carry out analysis
Once you have chosen a pair, it is important to carry out both technical and fundamental analysis before opening a trade. This is because analysis can show you whether a trade has the potential to yield a profit or not.
Technical indicators such as Bollinger bands, and Fibonacci retracements can help you to identify whether a forex pair is currently over or undersold, and they are also good indicators for volatility. This means that they are capable of highlighting whether a forex pair is about to experience a bearish reversal – a perfect opportunity to open a short position.
Choose a forex trading strategy
There are a whole host of trading strategies that you can use to your advantage during your time on the markets. For example, you could take up a short position on the EUR/USD pair with a scalping strategy, which relies heavily on quick and constant price movements during a single trading session.
Create an IG account
You can open an IG account in minutes, and there’s no obligation to add funds until you want to place a trade.
Open, monitor and close your first position
Once you have chosen your pair, carried out your analysis and selected a strategy, you are ready to start trading. To do this, open the deal ticket for your chosen market and – to go short – select the ‘sell’ option. Alternatively, if you did want to go long, you would select ‘buy’.
From this window you can also select whether you wish to add any stops or limits to your trades, which can help to limit losses and lock-in profits. If you wish to close your position, you would simply make the opposite trade to the one which you made to open it – a buy position on a short trade, and a sell position on a long trade.
Shorting currencies summed up
- Going short means that you are betting against the market
- Betting against the market carries unique risks because your losses (in theory) could be unlimited if an asset’s price continues to rise
- As a result, it is important to use stops and limits to mitigate your exposure to risk
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