The Upside to the Forex Short Position

We generally associate realization of profits in the foreign exchange market by buying currency at a low price then selling it at a higher price later on. But did you know that you can make a profit in the forex by selling currency then buying it back at a low price later on as well?

It's a fact that the foreign exchange market involves trading in currency pairs. You may either be in a long position by buying the base currency (at the same time selling counter currency) or a short position by selling the base currency (at the same time buying the counter currency). In effect, the proverbial rule of profits holds true when you're long then you sell at the point when the prices are up. Accordingly, this holds true as well with regards to the counter currency. We'll discuss the other side of the coin and see how you can make a profit when you're short in the forex.

"Selling short" or "short selling" occurs when you're in the short position with the expectation that the price will soon drop so you can then buy back the currency when the price actually goes down to realize a profit. This follows the approach that considers the counter currency movement in dropping prices as opposed to focusing on the base currency alone.

Case in point, you're trading a 10,000 lot and you're short US dollars/Swiss francs at 1.2025 because you expect that the price will go down. Your expectation comes true and the price goes down to 1.2015. At this low price you buy back US dollars (at the same time selling Swiss francs) and make a profit of ten pips (a "pip" is the smallest unit of currency price).

If you compute your trades, you'll see that you initially sold 10,000 US dollars for 12,025 Swiss francs (10,000 Lot x 1.2025) to be in a short position with the intention to short sell. When the price dropped down to 1.2015, you bought back US dollars using your 12,025 Swiss francs which made you 10 US dollars in profits (a pip is normally a US dollar for a lot of 10,000).

There's always an opportunity to sell short and earn a profit in the forex. Market prices particularly move up and down, following a trend, and rarely move straight on up or otherwise for long periods of time. A key to making a profit in the short position is recognizing when the currency price will trend down in your favor. Characteristically, a few minutes can weigh a lot in the forex decision because of its volatility. So being short the base currency while it's trending up is a necessary risk when short selling is your intention. It's inevitable that it will trend down at a price low enough (hopefully before it trends back up again) for you to buy back the currency and earn a profit.

The currency price movements in the forex allow traders to earn a profit when prices are rising and when prices are dropping. This feature is one of the reasons that make the foreign exchange market one of the most popular markets in the world. Normally, novice traders are more familiar with going long and profiting with rising prices. It's an advantage to know the other side of the coin also. There's an upside with going short in the forex because as you can see, there's money in dropping market prices as well.

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