What is ‘going short’ in forex?
‘Going short’ in forex refers to a trading strategy where an investor sells a currency pair with the intention of buying it back at a lower price in the future. This strategy is based on the belief that the value of the currency pair will decline.
When going short, the investor borrows the currency from a broker and sells it on the market, hoping to buy it back at a lower price and return it to the broker, pocketing the difference as profit. This strategy allows traders to profit from falling prices in the foreign exchange market.
Example of ‘going short’
Let’s say you believe that the value of the EUR/USD currency pair will decline. You decide to go short by selling Euros and buying US Dollars. If the exchange rate is 1.10, you sell 1 Euro and receive 1.10 US Dollars.
After a while, the exchange rate drops to 1.05. At this point, you decide to close your trade. You buy back the Euros using the US Dollars you received earlier. Since the exchange rate has decreased, you get more Euros for the same amount of US Dollars.
By going short, you have profited from the decline in the value of the Euro against the US Dollar.