What is short selling?

What is short selling?

Forex trading is speculation about the future value of the currency. Forex traders can speculate whether the cost of a currency pair can rise or fall.

In general, when a trader believes that the price will fall, the trader will short a pair of currencies.

When traders short the currency pair, they expect the value of the currency pair to depreciate soon. Short selling is a way to profit from falling market prices.

Short Selling

With all trading CFDs a sample, not all foreign exchange transactions are to buy low and sell high. By selling short, we sell high and then buy low.

It is often difficult for novice traders to master this concept. The most common question is, how does someone sell things you don’t own? In foreign exchange trading, we never hold anything, because trading is purely a guess of future value.

The main points to note when short-selling

  1. Investors need to be able to judge the overall trend of the market. In the actual transaction process, shorting has strict technical requirements. Since short selling operations only adapt to the fact that the market is declining, investors should recognize the future direction of the market. Otherwise, you will lose too much profit.
  2. Shorts need to master the rhythm, whether it is the stock market or the futures market. Sometimes market changes will be very sudden, and the short-lived and sloping plunge is also standard. Therefore, investors must use these moments to grasp the rhythm of the operation and to do the work.
  3. Take advantage of the trend. In the transaction process, the most crucial point is to pay attention to the pattern.

The risk of short selling currencies

The uncertainty of a quick selling mechanism also exists, because when selling short, the investor is not the owner of the stock he sells, and he needs to buy it at the current price when returning.

When the stock price continues to rise, and the trade is light, it is unpredictable when the trade can be completed, or the stop loss expires.

Besides, the short-selling mechanism may also bring adverse effects to the market, which may cause a large number of stocks to sell, leading to market turmoil. At the same time, the short-selling mechanism plays a vital role in the financial market:

  1. Helps reduce the speculative and volatility of the stock market;
  2. Helps increase the liquidity of the capital market;
  3. It helps the price of securities derivatives. Fully reflect the actual price of the securities represented by the derivatives.

Short selling in the foreign exchange market

Short Selling

Trading in the Forex market always involves selling and buying currencies at the same time. Transactions are treated differently than in the stock market where a single stock is purchased or sold.

In the foreign exchange market, these currencies are quoted in pairs. This means that if you try to sell a USD/EUR pair, you will be involved in two simultaneous transactions. If you buy a EUR/USD currency pair, you buy both the Euro and the US Dollar.

Short selling in the foreign exchange market is easy because traders get a two-way quote.

Short sale examples

The short-selling of any foreign currency pair is the same. If you think the currency pair is likely to fall, you can start a short position and take advantage of the price drop.

Example 1:

If you think that the US economy will continue to deteriorate, this is not good for the dollar; you can buy the euro/dollar. This shows that you see more Euros and short Dollars.

On the contrary, you think that the US economy will continue to improve, the US dollar exchange rate will go higher, and the EUR/USD will fall. At this time, you need to enter the market to short the currency pair.

Example 2:

If you think the Swiss franc exchange rate is overvalued, the SNB may enter the market to buy dollars and sell the Swiss franc for intervention, and then you need to buy USD/CHF.

In the same way, if you feel that the US economy is slowing down, or the market demand for hedging is heating up, the Swiss franc as a safe-haven cargo has a safe-haven buying support, then you need to short the USD/CHF.

In conclusion

Short selling is a trading technique used to profit from the downtrend market. Short selling has been used as a hedging mechanism to protect smart currencies from price bearish movements.

Like all trading activities, short selling has its own risks. If the price rises sharply, you may lose all your original investment.

Author : Michael Fasogbon

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Michael Fasogbon is a professional Forex trader and cryptocurrency technical analyst with over five years of trading experience. Years back, he became passionate about blockchain technology and cryptocurrency through his sister and has since been following the market wave.