Short trade (sell, short)
What's a short?
Short or sell trade (sell, sell, short trade, short) - is the name of a sell transaction, which is opened by a market participant in the expectation to gain profit from a fall in the price of an asset. The very name of a buy short or short trade is a slang term and appeared on the stock exchange.
The concept of a short trade was originally applied to the stock market at the advent of so-called margin trading. Margin trading gave an opportunity to sell the goods taken on credit at a more attractive price, receiving a quick profit. Hence the name "short trade".
Market participants who open sell trades, i.e., play for a decrease in the price of an asset, are called bears. Bears are believed to be pawing the price downward.
The opposite of a short trade is long trade or longAccordingly, market participants who play to increase the price of an asset are called bulls. It is believed that bulls push the price up with their horns.
What is a short trade on ?
A sell transaction is also called a short transaction or a short. A sell transaction in the foreign exchange market implies the sale of the base currency for the quote currency.
For example, in the GBP/USD currency pair the base currency is GBP and the quote currency is USD. Accordingly, opening a short in the GBP/USD pair, a trader sells a certain volume of pounds sterling for dollars, counting on the fall in the value of the British currency.
The mechanism of a short trade on can be explained with a simple example:
- You have £10.
- 1 pound sterling is worth 1 dollar.
- You are assuming that the pound to dollar exchange rate will fall in the future.
- You sell 10 pounds at $1, you get $10.
- After a while, the pound rate drops to 50 cents per pound.
- With the $10 you have, you buy $10 x $0.5/lb = 20 pounds already.
- Bottom line: you had £10 and it became £20, meaning you made a profit of £10.
But, since the deposit is usually denominated in US dollars, a sell position in the GBP/USD currency pair, i.e., selling the pound against the dollar, is the same as a long in USD/GBP, i.e., buying the dollar against the pound.
When to open a sell position?
As a rule, a short trade is opened on the assumption of a further fall of the base currency in a currency pair.
In fundamental analysis, it can be the publication of positive macroeconomic statistics, increase in the Central Bank interest rate, etc.
From the point of view of technical analysis, shorts are opened when the price bounces off the levels of support (upper boundary of a downtrend or sideways trend). As a rule, sell positions are used only when trading in a downtrend and on a rebound from the upper boundary of a flat trend. Opening short trades against the trend carries high trading risks.
A Sell position in MetaTrader 4 is opened with a Sell order, but a short position can also be opened with pending orders SellLimit and SellStop.
When to close a Sell trade?
As a rule, shorts are closed when the price reaches the opposite boundary of the price channel (support line of a downtrend or flat). In the MetaTrader 4 terminal, buy trades can be closed using the set TakeProfit order or manually. Profit on the transaction will be equal to the difference between the invested and received funds in the base currency.