Buying short

Beginner Questions
1

:confused:
Can someone explain to a 5th grade mentality how buying short can make a profit.
Just can’t wrap my brain around this concept.

2

basically your “betting” that the pair will drop…did this help???

3

Although not legal in many areas of life lets suppose I sell you a piano that you dont want to collect for 90 days and I charge you the current going rate say of $2000. I dont have that piano but if I have to fulfil the contract then within the next 90 days I am going to need to buy it to give to you to fulfil my contract with you. If the price of a piano goes down in the meantime I make a profit by buying it to supply to you at less than I charged you for it. In reality in trading the contracts are promises to buy and sell and the contracts are closed out without physical delivery of the goods (in the case of fx the actual currency) but the principle is the same. If you had sold some US dollars 6 months ago and had to make delivery now you could buy them at about 10% or so less than you sold them for earlier in the year

4

Thanks for the replies guys. Think I got it.
But for now will stick to buying long.

5

Must…not…let…head…explode… :eek:

“Buying short” is a complete contradiction in terms. You can “go short” or “sell short”, but you can’t “buy short”.

6

I learned this one by accident last month. I forgot to cancel a sell oder after I closed a long order with MG Forex. With them you must close all orders individually. Well, I went to bed, got up and found I made 100 pips and a nice profit. I’ve been going long and short since. Made over 1000 pips this month with my new broker’s demo. It sure was a nice surprise. :smiley:

7

OK - Price is in a down trend, you put in a sell order(which would actually be a buy?) When price drops further you place
a buy?

8

OK - Price is in a down trend, you put in a sell order(which would actually be a buy?) When price drops further you place
a buy?

Webfoot you need to read babypips school, here’s
the link.

School of Pipsology - - Beginner’s Guide to Forex Trading, Free Forex Education, Learn to Trade Forex, Forex Training - BabyPips.com

Read through it & get a demo account from somewhere
to practise on.

But to quickly answer your query, if price is in a downtrend,
you would go short, x lots, or sell the base currency, then once you feel you
have made enough profit you do the reverse, buy x lots of the base currency
or go long, which basically cancels out the original order.

But on most platforms you would just cancel the original order at
your take profit (TP) level.

Read babypips though & practise on a demo it will all become clear.

9

No, it would actually be a sell, not a buy. It’s called [I]selling[/I] short, not buying short. :slight_smile:

I had trouble with the concept of selling before buying when I first started, too.

Just remember that you’re not really paying for anything until the transaction is settled, so you can sell currencies without owning them, then buy them when the price goes down.

And, like daydreamer said, you’d do yourself a big favor by going through the free Babypips school first, before you do anything else. That will give you a good overview of how things work. Then you can refine your knowledge from there.

Terry

10

Thanks In2blues,

I miss understood the question. I thought webfoot was talking about the downtrend trading. It didn’t even occur to me he meant buy at bottom of downtrend and sell at top of uptrend (when possible or should I say lucky enough).:slight_smile:

11

Hello,

With regards to “[U]selling before buying[/U]” concept, I too had a problem understanding that myself when I first decided to go into forex trading. From my research, & hours of arguing on the phone with customer service agents, I came up with the following understanding.

When you buy Eur/USD -aka going long-, you simultaneously buy Euros & sell dollars. So when the Euros you bought go up in price you sell the Euros & buy the dollars again & add profit to your account based on the difference -measured in pips-.

So, what if you expect that The Euro will go down compared to the dollar? In any conventional market you’d simply stand in the sidelines waiting for it to reach maximum downtrend then buy it to sell when the price goes up again. This is not the case in forex.

Any transaction involves buying a currency & selling the other in the same time. So when you sell Eur/USD -i.e. go short- you simply buy dollars & selling Euros in the same time. When the dollars go up against the Euro, you simply reverse the transaction and gain extra profit.

So buying & selling Eur/USD is [B]exactly[/B] the same operation, but in reverse direction. Yet you may get concerned, how can I sell Euros while I only have dollars in my account? To answer this we must get a very quick idea on margin trading.

Also most of traders use [B]margin trading[/B], which means basically you don’t trade with your own money. Rather you deposit a good faith amount to borrow money from the broker, & trade with it. For example when you deposit $10,000 into your account, you don’t trade with this exact money. Rather you trade with borrowed money from the broker based on the amount you deposited, & the broker owns all currency pairs.

So you are buying & selling the broker’s Euros, & dollars rather than your own. The amount of the broker’s money you gain control of is based on your balance -or more precisely your equity-. You may refer to school of pipsology for more info about margin & leverage concepts.

So selling Eur/USD is actually buying USD/EUR & vice versa. Same goes to any currency pair. You always buy [B]and[/B] sell in the same time in every transaction. This may double your profits as you benefit from downtrends as well as uptrends.

I hop this was satisfactory.

Regards

12

Good explanation, Nader.

Terry

13

Good explanations so far. I would also say that it could be said this way.
Going long on EUR/USD means buying EUR.
Going short on EUR/USD means buying USD.
You can also just change the base pair. The operation is the same.
So if you think USD will be worth more compared the the EUR tomorrow you could go short on EUR/USD which is equivalent to “go long on USD/EUR”.

14

very well said Kramster… I do hope that Webfoot will clear the confusions regarding that matter…

And Daydreamer is right, you should undergo lessons of the School of Pipsology… It’s really a useful tool for you to learn the basics. I, myself been reading a lot and learning at the same time. I tell you, it’s really a great guide for you. :wink: