Shorting Currency Pairs: How Short-Selling Works in the Forex Market

Feb 2, 2021 12:04 PM ET

iCrowdNewswire   Feb 2, 2021  7:04 AM ET

With all of the recent news about GameStop, everyone is curious about what short-selling is. Plenty has been done to explain how short-selling works on the stock market, but in Forex things are a bit different. Here is everything you need to know about short-selling currencies.

What Is Currency Short-Selling?

When you open a trade in Forex, for any currency pair you can choose the direction of the trade. In other words, you can either buy or sell the pair. Buying, also known as going long, means you expect the pair will increase in value over time. Selling it, or going short,  relies on the opposite development, i.e. the pair decreasing in value. So, shorting, selling, and short-selling mean the same thing in this case.

But because currency pairs contain two assets (the base and quote currencies), every operation is two actions in one. The order to sell a currency pair means you will be selling the base and buying the quote currency in that pair.

Moreover, unlike in stock shorting, you do not need to borrow the pair you want to short from anyone. The broker does that for you, essentially. Thanks to the high liquidity of the Forex market, there is always a buyer and a seller for every asset. The trader is free to choose whether to click buy or sell and can close or change their position at any time.

How to Profit from Short-Selling Forex

To profit from your trade, you need to close your position. This will execute the opposite operation: if you close a sell position, you will buy the asset back at the close. Then you will have to pay the broker any outstanding fees, and everything that remains is your profit.

But what is the point of selling the pair if you have to buy it back in the end? Well, you sell it when you know that it will go down in value. Following the news and latest technical analysis (such as the free articles by SuperForex) can help you find the right time to do this. When you close your position, you will buy the pair at a lower price than you sold it for, thus making a profit.

Is Short-Selling Bad?

Not at all. Unlike shorting stock, selling currency pairs is not associated with a negative bias. When you sell company shares, you are basically rooting for the company to fail and drop in value. That will be a loss for the owners of that company and everyone who invested in it.

But currencies are not like that; they do not have owners and investors. There is no one behind them who suffer financially, not in the same sense. Plus, central banks always keep an eye on their national currencies and will take regulatory action if anything goes amiss.

Thus, you can short currencies in the Forex market to your heart’s content without a guilty conscience.