ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

How to Short Sell in the Currency Markets

Updated on July 9, 2013
one2get2no profile image

Philip retired from investment banking to write. To date he has written 9 books on trading forex, 3 short stories, and one poetry book.

There are numerous reasons why investors are uncomfortable with short selling. One powerful motive is because it is counter intuitive. It makes more sense and is far more logical for people to buy an asset, either tangible or intangible, keep it for a while, and then sell it at a price which is higher than the price you bought it. You buy a bond or a stock for $99, hold onto it for several months, and then sell it for $102, making a nice little profit. Let's take an example, you buy a house, you live in it, and the value of the house increases, so then you sell it to buy another house. You can buy another house for investment, you can rent it out to help pay for the mortgage on the property. You don't live there, but you still own the house. In all of these examples, you buy an asset, you own it, and then you sell the asset at a higher price.

However, and this is the rub, in short selling, you are selling something that you don't even own. I know that this sounds counter intuitive because you can't go around to your neighbour and sell something of his which you don’t own. Hence, short selling does not make a lot of sense to many people. The next example will ease you slowly into the notion of short selling.

Imagine that the shops have just closed and you suddenly remember that you need a loaf of bread to feed your dinner guests. You go over to your neighbour’s and ask to borrow a loaf of bread. Your neighbour has just bought a loaf of bread for $4, but she refuses the money you offer. Instead, she tells you to buy her another loaf of bread later, and you will be quits. The next day, you go to the supermarket and the loaf of bread is on sale for $2. You buy the loaf of bread and return it to your neighbour and save yourself $2 in the course of the transaction. In essence, you ate the bread, which is an asset that isn't own by you, and then you delivered an identical asset (bread) back to your neighbour at a later time. This then is the theory of short selling. A short sale is the sale of a security or an asset that isn't owned by the seller, but that is promised to be delivered.

Say for example you don't think that Microsoft’s share price should be at $140 per share because the company is not doing so well. You can borrow 10 shares from your stockbroker, and sell them for a gain of $1,400. When the stock price drops to $80, you buy back the 10 Microsoft shares at $800, and return them to your broker. You borrowed 10 shares from your broker, and then you returned 10 shares, pocketing $600 in the process. If the price of the stock rises, though, you have to buy it back at a higher price, and you would lose money.

In currency trading, you can make money when a currency pair is either up or down, if you are able to foresee the up and down trends in the market. If you think that the currency pair is going up, you buy at the low price and then sell at a higher price. Alternatively, if you believe that the currency pair is going down, you can sell at the higher price and then buy back at a lower price to recover. In real time currency trading, the currency rates are changing by the second. For example last Friday the Euro/Dollar currency pair at 11.05am was 1.3367, at 11.06 it was 1.3360 and at 11.07 it was 1.3376. If you had sold Euro at 1.3367 and bought it back at 1.3360 one minute later, you would have made 7 pips or $7 per $1,000 sold and bought. However, you could also have bought Euro at 1.3367 and sold them when the rate was 1.3376 two minutes later and made 9 pips profit.

In the stock market a bull market can last as long as several years; hence, it is difficult to switch your thinking from a bull, an upward trending market, to a bear market, a downward trending market. Currency markets however can have a bullish and a bearish period within a short space of time such as a day or even within an hour. Even though you have the tools for short selling and long buying to in the foreign currency market, currency trading is not easy to master and more than 90% of traders lose their money. The best and less risky way to start currency trading is to sign up with an online forex trading system where you can take advantage of leverages of 400 to 1 and don’t need to open an account with a lot of capital. What’s more you can practice using a dummy account with real time rates. Check out www.etoro.com or www.FXCM.eu or www.easy-forex.com

Comments

    0 of 8192 characters used
    Post Comment

    • one2get2no profile imageAUTHOR

      Philip Cooper 

      3 years ago from Olney

      Who is Jim Rodgers?

    • profile image

      Piotr 

      3 years ago

      Isn't this text comming from Jim Rogers?

    • profile image

      Bulls Capital Markets 

      3 years ago

      Hi there. Very cool website!! Man .. Beautiful .. Wonderful .. I will bookmark your site and take the feeds also…I’m happy to locate a lot of useful information right here within the post. Thank you for sharing.

    • kilco16 profile image

      James Kelly 

      4 years ago from Ireland

      It's way easier to make money short selling penny stocks rather than forex.

      http://pennystockwhizzkid.com/can-you-make-money-s...

    • profile image

      Pharme889 

      5 years ago

      Hello! cafeadc interesting cafeadc site! I'm really like it! Very, very cafeadc good!

    • forexpulse profile image

      forexpulse 

      7 years ago from Califorrina

      thank for sharing

      www.forexpulse.com

    • one2get2no profile imageAUTHOR

      Philip Cooper 

      8 years ago from Olney

      Thanks Billy

    • billyaustindillon profile image

      billyaustindillon 

      8 years ago

      A nice explanation of short selling:)

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)