Short selling, or shorting, is the trading method which allows you to profit from a decline in market price. The opposite of a long trade, where you buy in expectation of a rising market, in a short trade you sell in expectation of a declining market.

You can short sell not only in Forex, but also in other markets, such as shares. 

In Forex

When trading currencies, you are always taking opposite positions on the currencies in the pair. The direction of your position is derived from what you do with the base currency of the pair. You buy long when you buy the pair and sell short when you sell the pair. For example, if you go long, in other words buy EUR/USD, it means you are buying EUR and selling USD. When you sell EUR and buy USD, it means you are selling short EUR/USD.

Shorting Shares

You might think – how do I sell something I do not own? The answer is that in order to do so, your broker takes shares from its other clients or its own stock and lends you the shares to sell in exchange for interest payment. To close the trade, you buy the shares back from the market and return them to the broker. If the share price drops, you profit from the difference.

Short Selling with Derivatives

CFD brokers and Prop Trading Firms allow you to easily benefit from market movements in both directions, without having to bother with owning or borrowing shares. With CFDs, you can short sell various markets such as forex, shares, commodities, indices and crypto.

Risks of Short Selling

It is important to also note the risk you carry with shorting. Buying a financial market limits your loss to your investment, but selling has unlimited risk since markets can rise indefinitely. This is why, whether you approach such trades using a fundamental or technical analysis, you should make sure you manage your trading risk wisely. Utilizing risk management tools like stops and limits, risk-reward ratio etc. are essential.

For further reading you can visit our FPT Trading Academy​.