Selling Short

Discussion in 'Forex' started by toothman, May 17, 2006.

  1. toothman


    I've just started exploring currency trading(haven't traded yet) and watched the EURO/USD numbers all day.Saw them go from1.2899 in the am. to 1.2721 this afternoon.I would have to sell short to profit on a day like this .Correct? I can't wrap my head around the term selling short. Selling something before you buy it? Can anyone explain this concept to a beginner? Thanks
  2. jho


    Short (or Short Position)

    1. The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value.

    2. In the context of options, it is the sale (also known as "writing") of an options contract.

    Opposite of "long (or long position)".

    1. For example, an investor who borrows shares of stock from a broker and sells them on the open market is said to have a short position in the stock. The investor must eventually return the borrowed stock by buying it back from the open market. If the stock falls in price, the investor buys it for less than he or she sold it, thus making a profit.

    2. For example, selling a call (or put) options contract to a buyer entitles the buyer the right, not the obligation to buy from (or sell to) you a specific commodity or asset for a specified amount at a specified date.
  3. The completed transaction is still a buy and a sell. A short trade simply means selling before you buy.

    An analogy would be selling a customer a product which is not in stock and immediately buying it from the wholesalers for delivery to the customer the next day. In forex, and stretching the analogy a bit further, we hope that by the time we contact the wholesaler the price has dropped and so increase our profits.

    You will always want to buy low and sell high. Therefore, in a falling market, being able to sell at market and then complete the transaction with a buy later after the price has fallen is very advantageous.

    Short selling works particularly well in forex because we trade pairs.

    Best regards
  4. faure


    In terms of forex I like to think of as entering into a contract. When you short eurusd you are entering into a contract whereby you assume the risk/profit of the dollar gaining in value against the euro.

    So if your contract/the usd vs euro, gains value you make cashmoney. If the eurusd rate goes up (the dollar goes down) your contract loses value and hence you lose cashmoney.
  5. I have been teaching people to trade for almost 10 years now, and this continues to be a problem for them.

    My solution is this.

    Buy low, sell high...we all know what this means.

    What we need to include here is that it doesn't matter in which order you do it.

    Sell high, buy low...that's the goal of going short.

    Now, for some more detail about what "going short" on the forex is. There is no such thing, technically, as a short trade on the Forex.

    In a currency pair like the EUR/USD, if you buy the currency than your are betting that the "pegged currency" (the first one in the "fraction"), or the EUR in this case, is going ot increase in value.

    So, you are purchasing EUR with the intention to exchange it back into dollars when you get more $$$ back than what you paid.

    On the other hand, when you "sell short" the EUR/USD, you are betting that the USD will rise in value, therefore sending the EUR lower in value.

    In this case you are purchasing USD in exchange for Euros, and are betting that you could sell those $$$ back in return for more Euros.

    See, that sounds so much more complicated and I hate it.

    So, once again, the simple version.

    Buy low, sell whatever order you like.

    I hope this helped...and good luck.
  6. MTE


    First of all, noone made any reference to the fact that the term "short selling" is not really applicable to FX trading. In FX you trade pairs where you buy one and sell the other or vice versa. So you either buy USD and sell EUR or you sell USD and buy EUR. You can also think in terms of one currency being an asset such as, say stocks. For example, if your base is USD then EUR is an asset for you. So you either buy it and thus pay a price in USD or you sell it and receive USD.

    True "short selling" is only applicable to stocks where you borrow a stock from someone else and then sell it in hope that you can buy it later on at a lower price.

    In derivative markets (options and futures), the term is "shorting" or "going short". Derivatives, unlike stocks, are contracts and each contract has a seller and a buyer. You can either enter into a contract as a seller or as a buyer.