Assuming that I have a forex account with 100 USD and a leverage of 1:1
If I was trading in the EUR/USD and I was expecting the price of the pair to go down, how can I make a profit of selling
The concept of selling something to make money is always a challenge for new traders. However the truth of the matter is if you sell the EUR at 100 at some point you have to buy it back. So if you sell the EUR at 100 and it fails to 80 and that is where you buy it back it has cost you 20 less to buy it back and that means you get to keep the 20. That’s your profit. Conversely if you sell it at 100 and it rises to 120 and you are then forced to buy it back at that price it costs you 20 more to buy it back and you lose 20.
People say where do I get that currency in the first place to sell. Well without getting too technical it is just a contract you sell and buy a contract. Nothing more nothing less.
Hope that helps.
Cheers
Blackduck
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What Blackduck posted is correct.
Here is a more detailed answer to your question.
In this market, we don’t buy and we don’t sell currencies, currency pairs, or anything else. We use the terms buy and sell, because it’s convenient to do so.
In this market, we speculate – which can best be thought of as betting – on the direction of currency-pair price movement. When we speculate on a rising price, we go long, which is similar in many ways to buying. And when we speculate on a declining price, we go short, which is similar in many ways to selling.
If we bet on the right direction, we make money, whether that direction was up or down. In other words, going short when price is going down is just as good as going long when price is going up.
Take note of these facts:
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If you go long, you don’t “buy” anything. You simply bet that price will go up. If it does, you make a profit.
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If you go short, you don’t “sell” anything. You simply bet that price will go down. If it does, you make a profit.
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The pips you make going short are worth just as much as the pips you make going long.
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The margin required to go short is exactly the same as the margin required to go long.
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The spread that you have to overcome is just the same, whether you go short or long.
So, the answer to your question is this: You can make a profit going short (selling, as you put it in your question) by anticipating a downward move in price, and entering your short position ahead of that move.
As for the numbers in your post – $100 account and 1:1 leverage – there’s hardly any future in trying to trade with those metrics.
Think about what those metrics require: The largest position you can enter (either long or short) is one with a notional value of $100 or less. That means, if you are trading a pair like USD/JPY (or any pair with USD as the base currency), then the largest position you can enter is 100 units of USD/JPY.
Most brokers do not offer trading in such tiny positions. However, there is one decent broker that does offer trading in unit amounts – all the way down to one unit of any currency pair – and that’s Oanda.
Let’s say you have a $100-account with Oanda, you have 1:1 maximum allowable leverage, and you place an order to go short 100 units of USD/JPY (worth $100). And let’s say that you have correctly bet that the price of USD/JPY will decline. Finally, let’s say that USD/JPY goes down 50 pips, which is a typical daily price move for this pair.
How much profit did you earn?
In your 100-unit USD/JPY position, each pip of price movement is worth $0.009434 (assuming a current price of USD/JPY = 106.00). You can get this pip-value from the Babypips Pip Value Calculator.
So, if your position cleared the spread, and then made a profit of 50 pips, you earned 50 x $0.009434 = 47¢. All that work, and checking on your position throughout the day, to earn 47¢. After you exit your position, your account stands at $100.47
Now, suppose you have maximum allowable leverage of 50:1 (which is the most Oanda can offer you, if you are condemned to living and trading in the United States). With 50:1 leverage, you can enter positions up to 50 times the size of your account.
It might not be prudent to use all that leverage, so let’s assume that you actually use 10:1 leverage.
Using 10:1 leverage, your position size in the USD/JPY trade would be 1,000 units of USD/JPY, worth $1,000. And, if you were short, your profit on that 50-pip down-move would be ten times as much as before. That is, you would earn $4.71. Now your account stands at $104.71.
If you have followed all of the above, you should be able to figure – in your head – what the metrics would be, if you used all of the 50:1 maximum allowable leverage available to you.
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Hi Clint
That is a very good explanation.
I only kept it simple because i know that it was really hard for me to get my head around the idea of selling when I first started. I wasn’t sure how advanced @abood223 is in their trading journey.
I remember a trader gave me a story about selling apples and that’s when the penny dropped.
Cheers
Blackduck
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In FX (and other derivatives), since you’re trading contracts and not anything physical, you’re not actually buying or selling anything. You’re basically just making a bet whether something will go up or down in price.
For example, you think EUR/USD will fall in price soon.
When click “Sell”, you simply enter in an agreement (“the bet”) with your “broker” that you think EUR/USD will fall.
When you decide to exit this agreement, if EUR/USD has indeed fallen, the difference between the entry price and the exit price is your profit. Vice versa if EUR/USD has risen though.
Using a real-world example, let’s say you step outside and it’s currently 86°F (30°C). Pretend there’s a company that allows you to make a bet on whether the temperature will go up or down. This is basically how FX trading works, but instead of temperature, you’re making bets on exchange rates. 
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Thanks a lot for your time.
I have done a pretty decent research about how forex works, but I did not find a clear answer about how it exactly works, all what I found was that you don’t borrow from the broker and you buy and sell positions rather than currencies
Just to make sure that I understood correctly, trading in forex in not buying and selling “exchanging currencies”, it is rather a big betting game where you bet in the movement of the price and depending on how much your prediction was right or wrong “how much the price moved with you or against you” you will lose/gain money.
Is this how forex actually works?
Our little corner of the worldwide foreign exchange market is referred to as “the retail spot forex market”.
You have given a perfect description of the retail spot forex market.
Keep in mind that the retail spot forex market is less than 4% of the overall market. When last measured by the Bank for International Settlements (BIS), the overall market was $6.6 TRILLION PER DAY – by far, the largest financial market in the world. We do not influence prices in that vast market to any degree, whatsoever. We simply follow along, and bet on what that market is doing.
You said that you have done considerable research on the forex market. If you are a serious student of the foreign exchange market, you might like to spend some time reading this article in Wikipedia – Foreign exchange market - Wikipedia
And if you really want to get into the tall grass, you might want to tackle the most recent (2019) Triennial Central Bank Survey from the BIS. That’s where the $6.6 TRILLION figure comes from. Here’s a link – https://www.bis.org/statistics/rpfx19_fx.pdf
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That sounds pretty weird, by the way. In my opinion, a beginner should already know this, because to start on the market you need knowledge.
Even if you were buying and selling real currencies the concept of selling a currency pair or shorting in forex is very simple.
Let’s say you want to short the EURUSD. This is simply exchanging euro for US Dollars. Or selling euro and buying usd.
But, if you have Swiss francs and you want to short EURUSD, you would have to sell the Swiss francs to buy euros, then sell the euros to buy USD.
If the USD appreciates in value, you would reverse the transaction to realize the profit.
If the USD depreciates in value, you still have to reverse the transaction to realize the loss.
This is how you make profit, or loss, from selling.
What the other posters have explained is what you are trading.
Ignore ProfitPotential’s post. Everything in it is incorrect.
When you short the EUR/USD, you do not exchange euro for dollars.
You do not sell euro and buy dollars.
Your broker is not a currency-exchange kiosk at the airport. He doesn’t have dollars to sell to you. And he wouldn’t buy euro from you, even if you had some to sell to him. So, get this bullshit about buying and selling currencies out of your head, and learn what actually goes on in the retail spot forex market.
Well, that’s so, but of course just about everyone says “buy” and “sell.” Back in the day when giving phone directions to the broker, they wouldn’t even take the order without me actually saying “buy” or “sell.” That was with a contract that very few would even think of taking delivery on.
Yeah, and it’s too bad we can’t trade stocks in the USA the same as the forex retail (off topic.)
Its all correct, 100% correct.
The CFD mimics the trading of the physical. The Physical is what actually goes on in the Forex market.
I would make or lose the same for $100,000 traded whether I did that with a Forex broker or a currency exchange kiosk. Provided the trading conditions were the same (spreads same, no swaps, 1:1 leverage.)
I agree though, that no physical exchange is going on with the Forex broker as it would be with the currency exchange kiosk.
It is not really done same way. If you explain online trading using physical illustration in relation to currency exchange, the person will be confused. Focus on what happens on the platform. Focus on explaining what simultaneous trading means.
In my opinion, the whole essence of trading is precisely in making a profit. And if a trader asks such a question, apparently he does not fully know the essence of trading.
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This site is were new traders who are learning ask questions so that they can learn and understand what trading is all about.
Blackduck
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Simultaneous trading means buying one currency by selling another.
This is how it works.
It is pretty simple to understand.
Just because you are not taking physical delivery of the currency, that does not mean you are not buying or selling something. You are buying or selling a CFD, that mimics the physical exchange of currencies and their exchange rates.
If you are not buying or selling something, how is it possible to make a profit or a loss?