Sell what's borrowed, buy it back:you gain if price is on the downward track.
Selling a currency pair you do not own with the expectation of buying it back at a lower price.
In forex, short selling is as straightforward as going long because every trade involves selling one currency to buy another.
In plain words
Short selling is opening a trade by selling first, with the aim of buying back later at a lower price. If the price goes down, the difference is the gain; if it goes up, the difference is the loss. In a currency pair, selling the pair means selling the base currency and buying the quote currency.
See it move
Reached: Buy back
Why it matters
It lets a trader act on a view that a price is heading lower, and with products such as CFDs it needs no ownership of the thing sold. The risk is shaped differently from buying: a price can drop only as far as zero but has no upper limit, so the possible loss on a short position has no fixed ceiling.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
A trader sells one standard lot of EUR/USD at 1.1000.
- 1Bought back at 1.0950a fall of 50 pips, and 50 × 10 = 500 US dollars gained.
- 2Bought back at 1.1050 insteada rise of 50 pips, and 50 × 10 = 500 US dollars lost.
- 3A short position is closed by buying at the higher of the two quoted prices, so the spread is paid on the way out.
The short position gains when the pair goes down and loses when it goes up, the mirror image of a bought position.
A common mistake
Selling a currency pair short is not a bet against money as such. Selling EUR/USD is at the same time buying US dollars with euros, so a short position in one currency is always a long position in another.
Check yourself
Educational information, not investment advice or a recommendation to trade.