In the financial markets’ lingo, you can “go short” when you believe that a security’s value will fall in value by shorting it, whether it’s an equity or a currency.
For stocks, you basically borrow shares and then you agree to pay it sometime later at a price more favorable for you. From the time you execute the short sale until you close it, if the shares depreciate in value, your profit will be equal to the difference of the two values.
In forex, it’s basically the same idea.You predict that a currency will fall in value, and if you’re right, you can have a nice payday.
The only difference between short selling in the stock market and the forex market is that currencies are always in pairs. Whenever you Online Trading Smart Reviews, you’re actually betting that one currency’s value will rise (you go long on that one), and the other’s value will fall (you go short).
Going Short in Forex
Like in going long, you’re simply putting a sell order on a currency pair when you go short. All currency pairs have a base currency and a quote currency. For instance, USD/JPY = 100.00. The US dollar is the base currency and the Japanese yen is the quote currency. This quote means that one dollar is equal to 100 yen. When you short on this pair, you go short on the dollar and you simultaneously go long on the yen.
The General Risk
Just like any other ventures, you must risks in mind before jumping in.
In general, you have to face the difference in risks between “going long” and “going short.” If you want to go long on a currency, the worst situation can be when the value of that currency falls to zero.
Meanwhile, in a long position, you can limit your loss since the value of the currency can’t reach below zero. If you’re shorting a currency, you’re practically betting for a fall of a currency that in fact could rise and keep rising.
In theory, the value’s rise is unlimited, and the same goes for how much the value could lose.
If you want to limit those risks mentioned above, it’s a good idea to put a stop loss or limit order on your short.
A stop loss order tells your broker to close your shorted position once it climbs up at a certain value, thus keeping you away from further losses. On the other hand, a limit order lets you close out your short when the currency’s value slides to a predetermined level, safeguarding your profit and mitigating further risks.
The maximum gain you can get from a short trade is 100 percent. That’s quite fantastic. However, keep in mind that the downsides are quite infinite. As mentioned above, if you go short you’re trying to profit on a decline. And there is limited scope for downside compared to upside.
The FSMsmart Online Trading market gives you much more flexibility for short selling. But it is still very important to remember that you still need to throw good risk management in the mix.