In forex trading, a short position involves selling the base currency of the currency pair with the expectation that its value will decrease relative to the quote currency.
In essence, you’re betting that the first currency in the pair will weaken against the second currency.
To clarify, when you take a short position on a currency pair:
- You are selling the base currency (the first currency in the pair) and buying the quote currency (the second currency in the pair).
- If the base currency weakens (or the quote currency strengthens), the currency pair’s price will fall.
- You can then close your short position by buying back the currency pair at a lower price, making a profit from the difference.
For example, let’s say you think that the Euro (EUR) will decrease in value against the U.S. Dollar (USD).
You decide to short the EUR/USD pair at 1.1200.
Later, if the price of the EUR/USD drops to 1.1100, you would then close your short position by buying the pair at this lower price. The difference, 0.0100 (or 100 pips), is your profit.
However, if your prediction was wrong and the EUR strengthens against the USD (or the USD weakens against the EUR), the price of the pair would rise, and you would face a loss if you decided to close your position.