In all financial markets, including the Forex short for Foreign Exchange , you "go short" by shorting an equity or a currency when you believe it will fall in value. If the shares fall in value from the time you execute the short sale until you close it out by buying the shares at the later and lower price , you'll make a profit equal to the difference in the two values. When you go short in the Forex the general idea is the same -- you're betting that a currency will fall in value. If it does, you make money.
The biggest difference between a short sale in the stock market and going short on the Forex is that currencies are always paired; every Forex transaction involves a long position in one currency, a bet that its value will rise, and a short position in the other currency, a bet that its value will fall.
The quote will usually look something like this: This quote shows that one U. When you place a short trade on this currency pair, you are going short on the USD Dollar and, as a result, simultaneously going long on the Japanese Yen.
It may sound complicated at first, but the underlying idea is straightforward: Another difference between shorting in the stock market and on the Forex is that unlike the stock market, going short on the Forex is as simple as placing your order.
If you're thinking about going short in the Forex, you must keep risk in mind -- in particular, the difference in risk between "going long" and "going short. But there is a limit to your loss on a long position as the value of a currency can't go lower than zero. If you're shorting a currency, on the other hand, you're betting that it will fall when, in fact, the value could rise and keep rising. Theoretically, there's no limit to how far the value could rise and, consequently, there's no limit to how much money you could lose.
One way of limiting your downside risk is to put in stop-loss or limit orders on your short. A stop loss order simply instructs your broker to close out your position if the currency you're shorting rises to a certain value, protecting you from further loss. A limit order, on the other hand, instructs your broker to close out your short when the currency you're shorting falls to a value you designate, thus locking in your profit and eliminating future risk.
Naturally, that sounds great, but the downside of a short trade is infinite. As explained earlier, a trader going short is profiting on a decline, and there is relatively limited scope for downside compared upside.
The FX market provides a good deal more flexibility for short-sellers and other markets, but it's still important to note selling short still needs to be combined with good risk management.
The Balance does not provide tax, investment, or financial services and advice. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. Updated February 05, Stock Market Shorts In all financial markets, including the Forex short for Foreign Exchange , you "go short" by shorting an equity or a currency when you believe it will fall in value.More...