Selling (Going Short) Kerosene Futures to Profit from a Fall in Kerosene Prices

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How to Sell Short Currencies in the Forex Market

In all financial markets, including foreign exchange (forex), you sell short when you believe the value of what you’re trading will fall. With a stock, what you’re doing is selling borrowed shares you don’t actually own and agreeing to return those shares at some time in the future. If the shares fall in value from the time you initiate the short sale until you close it out—by buying the shares later at the lower price—you’ll make a profit equal to the difference in the two values.

Going short in the forex market follows the same general principle—you’re betting that a currency will fall in value, and if it does, you make money—but it’s a bit more complicated. That’s because currencies are always paired: Every forex transaction involves a short position in one currency and a long position (a bet that the value will rise) in the other currency.

Placing a Sell Order

Another difference between shorting in the stock market and the forex market is that in the latter, you don’t have to borrow a certain amount of the currency you want to short. Going short in forex is as simple as placing a sell order.

Parts of the Pair

All currency pairs have a base currency and a quote currency. The base currency comes first in the currency pair, and the quote currency comes second. So for the GBP/USD pairing, the British pound is the base currency and the U.S. dollar is the quote currency.

Pip Values

Changes in price are measured in pips. For every currency but the Japanese yen, a pip is 0.0001 of the value of the quote currency. When the yen is the quote currency, a pip is 0.01 yen. (Brokers will sometimes give values out to one digit past the pip—one-tenth of a pip or a pipette.)

Lot Sizes

Many currency transactions are carried out in the standard lot of 100,000 units of the base currency. They can also be done in mini lots of 10,000 units or micro-lots of 1,000 units.

Let’s say the GBP/USD rate is 1.3452, which means 1 pound is valued at $1.3452. If you expect the value of the pound to fall against the dollar, you would sell the currency pair at that rate. If you bought the pair after the rate went to 1.3441, you would have made 11 pips.

The math to find the value of a pip in the quote currency for a standard lot of the base currency is: 0.0001 (one pip) / 1.3452 (exchange rate of pair) x 100,000 (lot size) = $7.43. That means for your 11-pip gain, you would have made 11 x $7.43 = $81.73, excluding the commission.

Brokers may charge a set commission—perhaps $5—for each currency trade of a standard lot they carry out, or they may keep the difference between the bid price and the ask price for each trade.

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Reducing Risk

If you’re thinking about shorting a currency pair, you must keep risk in mind—in particular, the difference in risk between “going long” and “going short.” If you were to go long on a currency, the worst-case scenario would be watching the currency’s value falling to zero. While that bet would be bad for your investment portfolio, your loss would be limited, because the value of currency can’t go lower than zero.

If you’re shorting a currency, on the other hand, you’re betting that it will fall when, in fact, the value could rise and keep rising. Theoretically, there’s no limit to how far the value could rise and, consequently, there’s no limit to how much money you could lose.

One way of curtailing your risk is to put in stop-loss or limit orders on your short. A stop-loss order simply instructs your broker to close out your position if the currency you’re shorting rises to a certain value, protecting you from further loss. A limit order, on the other hand, instructs your broker to close out your short position when the currency you’re shorting falls to a value you designate, thus locking in your profit and eliminating future risk.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

A short guide to short selling on eToro

You may have heard the term “short selling” or “going short,” and there’s a good chance you know what it means. After all, short selling is one of the best ways to try and turn a profit when markets are down. In short (pun intended), short-selling is a practice which enables traders to open a position that will increase in value if a financial instrument’s price goes down. This is used either when markets are falling, or as a hedging tool.

How short selling works

Short selling is an agreement between a trader and a broker, that can be carried out in various forms. The simplest scenario is one in which the broker lends the trader a certain asset, such as a number of a certain company’s stocks. The trader then immediately sells the stocks, and, after their price goes down, buys them back for a lower price. He then returns the assets to the broker and keeps the difference.

Of course, this is the optimal scenario for the trader, and often the transaction can prove to be less favourable. The term “short” refers to the fact that, after borrowing the stocks and selling them, the trader is now “short” a certain number of stocks.

On the eToro platform, short selling is done using a Contract for Difference (CFD). When using a CFD, the broker and trader agree to the terms beforehand and settle the difference between themselves at the end of the transaction, without the underlying asset changing hands. If the broker is licensed and regulated, they are required to give their client market conditions that reflect the actual market as closely as possible, which is why using a CFD for short selling under these circumstances does not present a conflict of interest.

Opening a SELL position on eToro

eToro strives to give its clients an intuitive interface and a smooth trading experience, which is why opening a short position can be done quite simply on the trading platform. All you have to do is open a trade, and switch the toggle from “BUY” to “SELL”:

As soon as you switch to SELL and open your trade, the position will open as a short-selling position and will increase in value as the asset’s price goes down. Remember: the SELL function does not mean that you’re selling assets out of your portfolio, but rather, opening a new position that is “short”.

Like all trading platforms, prices on eToro have a spread, meaning the BUY and SELL prices are different (the BUY price is always higher). Therefore, when closing a short position, be sure to check the BUY price on the platform, as that is the price you will receive when closing.

Once you open the position, it will appear in your portfolio as a “SELL” position:

Short selling is a powerful tool and traders should familiarise themselves with it. When adding short selling to your trading and investing toolbox, a variety of new possibilities open up for you, as you can turn a profit even when markets are down. Moreover, short selling can be used as a hedging tool, to protect yourself from some losses if a certain position backfires.

Now that you have a better understanding of short selling, we recommend experimenting with it by opening a few short positions using your virtual eToro account.

Your capital is at risk. This is not investment advice. CFD trading.

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Past performance is not an indication of future results.
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