Short selling currency is popular among ETF traders, but it creates confusion among newbies. It is like taking positions covered by the falsehood of a downtrend. Basically, this term was widely used among commodity investors in the past, and people at that time used it in the negotiated deals. But in the existing financial market, this term is being used in reference to almost every asset, including currencies. In fact, in the Forex market, traders are now using short selling currencies the most. It is utilized by traders to avoid currency exposure and to make profits from the predicted analysis.
Here, our experts will help newbies to understand the basic knowledge about short selling. We will use the EUR/USD pair as an example.
What is short selling currency?
If you are relatively new to the trading world, then this is indeed a confusing term. In the stock market, investors wanted to gamble on the price of a particular asset whose price was falling. Traders wanted to gamble on that asset, but they didn’t own the asset they wanted to put their money against. But in reality, there was someone who held that asset. Brokers started to notice this as a possible opportunity. These guys wanted to sell the asset without owning. On the other hand, traders retained the asset for a longer period for no specific reason.
In the Forex market, the situation is different, though because the asset here is currency, and its currency is quite different. Every pair includes a base and a quote currency. When an investor short sell a coin, he is selling the base one and purchasing the quote in the hope of the fact that the value of that pair will decrease. Remember, to deal with such dynamic market, you must choose the best ETF account. If required, seek help from the pro Hong Kong traders and they will tell you the importance of having a well-regulated broker like Saxo.
Short selling example with EUR/USD
If a trader sells the EUR/USD, he is selling Euros and buying Dollars at the same time. Due to this, he doesn’t need to borrow to activate the short sale. Remember that the quote ones are relatively easy to read, which makes the entire short-selling simpler to understand. To sell the currency, the individual has to sell the quote. After that, to close the position, he must buy the same amount of the base currency.
Why should you manage the possible challenges for short selling currencies?
This carries greater risk because there are no maximum losses per trade. Remember that the losses are not limited in this case. The values in the ETF market can increase to infinity, and the same can happen in reverse. In a longer trade, the value of that currency doesn’t fall beneath the level “zero”, which may give a greater amount of loss. Besides this, handling the risks in a trading account is a skill, which every successful investor has. Luckily, there are several ways to minimize the risks related to this. Some of those ways include –
- Implementing the stop loss limits.
- Monitoring the primary levels of resistance and support level for exit or entry points.
- Staying up-to-date with the most recent economic events and news for a possible downtrend risk.
- Applying price alerts to the deals is an excellent way to get information. A newbie can even get data when he is away from the platform. Price alerts are much like email or mobile notifications, which always keep informing the ETF traders. You can determine the value beforehand for yourself.
Generally, this is used in a downtrend market. But we recommend that don’t chase after this strategy without implementing the risk or money management techniques because nobody knows the potential losses. It can either be thousands of dollars or hundreds. For an accurate assessment of this, good money management is vital.