What does short selling currencies involve?
In the forex market, transactions are handled differently to stocks which means the process of short selling a currency pair is very different. Firstly, a currency pair involves a base currency and quote currency as seen in the image below.
How to short forex: GBP/EUR short selling example
Taking a short position in forex involves understanding currency pairs, trading system functionality and risk management.
First, each currency quote is provided as a ‘two-sided transaction’. This means that if you are selling the GBP/EUR currency pair, you are not only selling Pounds; but you are buying Euros. Because of this, no ‘borrowing,’ needs to take place to enable the short sale.
Want to sell the GBP/EUR?
Just click on the side of the quote that says ‘Sell.’ After you have sold, to close the position, you would want to ‘Buy,’ the same amount (if you end up buying at a lower price than where it was sold, you would end up with a profit). You could also choose to close a partial portion of your trade.
As an example, let’s assume we initiated a short position for 1 contract and sold GBP/EUR when price was at 1.29.
If the price has moved lower, the trader could realise a profit on the trade. But let’s assume for a moment that our trader expected further declines and did not want to close the entire position. Rather, they wanted to close half of the position to cover the initial cost, while still retaining the ability to stay in the trade.
The trader that is short 1 contract GBP/EUR can then manually enter in 0.5, then click on the ‘Close’ button to begin the trade closing process – offsetting half of the short position that was previously held.
Our trader, at that point, would have realised the price difference on half of the trade from their 1.29 entry price to the lower price they were able to close on. The remainder of the trade would continue in the market until the trader decided to buy another 0.5 contract in GBP/EUR to ‘offset,’ the rest of the position.