How to short a currency is a way to profit from the value of a currency pair dropping relative to another. It’s a strategy often employed during times of economic uncertainty or market volatility.
Currencies are the world’s most traded asset, with trillions changing hands each day as goods and services are exchanged across the globe. The size of the foreign exchange market provides opportunities for speculators to make huge profits or, when things go wrong, lose huge sums. One of the biggest trades in history was a currency short by George Soros, who made over $1 billion on his bet that the British Pound would weaken against the US Dollar.
How to Short a Currency: Forex Trading Strategies Explained
To short a currency, you open a sell position on your trading platform. Each currency pair has a base or anchor currency and a quote or reference currency, and the price you pay to buy or sell the pair is determined by how many of the anchor or base currency you have to sell in order to buy one unit of the quote currency. You short the EUR/USD currency pair if you believe the euro will weaken against the USD, which means that it would cost less dollars to buy one euro.
As you hold the sell position, the price of the EUR/USD pair drops. As a result, you can then repurchase the euros at a lower price and keep the difference as your profit. The higher the price falls, the greater your profit will be. It’s important to understand the mechanics and risks of this strategy before you start using it, and be sure to use stop-loss orders and risk management tools to limit your exposure.