In Forex trading, a short position involves selling the base currency of a currency pair with the expectation that its value will fall relative to the quote currency.
Essentially, you are betting that the first currency in a currency pair will weaken against the second currency.
To clarify, when you take a short position on a currency pair:
- You sell the base currency (the first currency in the pair) and buy the quote currency (the second currency in the pair).
- If the base currency weakens (or the quote currency strengthens), the price of the currency pair will fall.
- You can then close your position by buying back the currency pair at a lower price, profiting from the difference.
For example, let’s say you think the value of the Euro (EUR) will fall against the U.S. Dollar (USD).
You decide to short the EUR/USD currency pair at 1.1200.
Later, if the price of EUR/USD falls to 1.1100, you will close your position by buying the pair at the lower price. The difference of 0.0100 (or 100 pips) is your profit.
However, if your prediction is wrong and EURUSD strengthens (or USD weakens against EURO), the price of the currency pair will increase and you will face losses if you decide to close your position.
If you want to learn more foreign exchange trading knowledge, please click: Trading Education.
