Monday, May 27, 2024

Short

When used in trading, Short refers to a position that takes a profit if the price of an asset falls.

is often used in the context of “ shorting t” or “ taking a short position ” or “selling”.

Short Forex

When you trade in the Forex market, as you buy or sell a currency pair, “going short” means you sell the base currency and buy the quote currency.

The working principle is as follows:

  1. You expect that the value of one currency relative to another will fall in the future.
  2. You are selling a currency pair, which means you are selling the base currency (the first currency in the pair) and buying the quote currency (the second currency in the pair).
  3. If your prediction is correct and the base currency depreciates relative to the quote currency, you can buy back the currency pair at a lower price.
  4. The difference between the price at which you originally sold the currency pair and the price at which you bought it back represents your profit.

For example, let’s say you expect the euro to depreciate against the dollar.

This means that you expect the EUR/USD currency pair to fall.

You decide to sell (go short) the EUR/USD currency pair at 1.2000.

Now, let’s say your prediction is correct and the exchange rate falls to 1.1900. You can then buy back the EUR/USD pair at a lower price.

Since you sold at 1.2000 and bought back at 1.1900, the difference of 0.0100 (often called 100 pips in Forex trading) is your profit.

However, it is important to remember that if the base currency appreciates relative to the quote currency (i.e. the price of the currency pair increases), you will suffer a loss.

This is because you will buy back the shoes at a higher price than the sale price.

Short selling stocks

“Short selling” or “going short” in stock trading refers to the act of selling a stock that you do not currently own in the expectation that its price will fall in the future so that you can buy it back at a lower price and Price difference profit.

Here’s how it works step by step:

  1. You believe the stock price will fall in the future.
  2. You borrow the asset from the broker and immediately sell it on the market at the current price.
  3. If your prediction is correct and the asset price falls, then you repurchase the asset in the market at a lower price.
  4. You return the borrowed assets to the broker.
  5. The difference between the price you originally sold the asset for and the price you bought it back for is your profit.

For example, you believe that the price of stock XYZ, currently trading at $50 per share, will fall.

You borrow 100 shares and sell them immediately for a total of $5,000.

Later, the price of XYZ did fall to $40 per share. You then buy back 100 shares for $4,000 and return them to the broker.

The difference of $1,000 ($5,000 – $4,000) is your profit, not including any fees or interest charged by the broker on the loan.

As with all trading strategies, short selling involves risks and requires a deep understanding of the market and prudent risk management.

If you want to learn more foreign exchange trading knowledge, please click: Trading Education.

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