Shorting currency means opening a position to sell a certain currency in hopes its price will actually go down soon and bring you some profit. Shorting is a major way to earn on the Forex market, and every novice trader should definitely learn how to do it effectively. While the concept seems pretty obvious, it takes a lot of practice to actually master shorting. In this article, we explain how it works, give you a bit of advice on when you should do it, and tell you about all the basic mistakes you should avoid.
How shorting works
Shorting, or short selling, is a basic operation in Forex trading. When you expect the price of a certain currency to rise, you buy it. When you expect it to fall, you sell it, and that’s called shorting. However, you can use more than just your intuitions to make predictions: there are numerous indicators which allow you to receive and verify signals about upcoming trends. That makes trading relatively simple: you just wait for a certain signal and open a short position.
However, you should be aware that shorting is inherently risky. When you buy an asset, your potential loss is limited to its price at the moment of purchase: it won’t go below zero, after all. When you short it, the price may rise higher and higher, so your losses are not limited by anything. However, you can limit your risks by placing stop-loss orders: this way, your broker will automatically close your position when it passes a certain value, preventing you from experiencing more losses.
While shorting seems pretty easy, you should really know how to short currency in order to be actually profitable. First of all, read more about Forex trading to determine which pairs are the most volatile or liquid. If you don’t know where to start, try shorting some major pairs like USD/EUR. When you find a pair you want to trade, make sure to perform both technical and fundamental analysis of the pair: it’s very important to consider all factors that may affect the price of your chosen asset.
Look for currencies which are about to enter a downward trend and open short positions. There are a variety of strategies you can employ: for example, you can hold your position for the entire day or just reap profits repeatedly using scalping. Don’t forget to pay attention to the trading conditions that your broker offers: they can be rather different.