How to Short a Currency: Step-by-Step Guide for Forex Traders
Dom Farnell
Co-Founder
Dom, a Co-Founder at TIC, is an avid investor and experienced blogger who specialises in financial markets and wealth management. He strives to help people make smart investment decisions through clear and engaging content.
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Last Updated 16/04/2025
Shorting currency is a strategy used by traders to capitalise on market downturns or economic instability. This guide will walk you through the entire process of shorting currencies in the forex market. Along the way, I’ll share personal anecdotes from my trading experience, giving you real-world insights into this strategy.
Quick Answer: How Do I Short a Currency?
Choose a currency pair, analyse market conditions, and open a sell position through your trading platform. You profit if the base currency weakens against the quote currency. Use stop-loss orders and risk management tools to protect your capital.
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What is Short Selling in Forex?
Short selling, or “shorting,” in forex is the practice of selling a currency that you don’t own with the expectation that its value will decrease, allowing you to buy it back at a lower price and pocket the difference as profit.
In the forex market, currencies are traded in pairs, meaning when you short one currency, you are simultaneously “long” on the other.
Many traders short currencies when they anticipate political instability, economic downturns, or interest rate cuts, which may lead to the devaluation of a specific currency.
How Does Currency Shorting Work?
Shorting currency can be tricky at first glance, but once you understand the mechanics, it becomes much clearer. Here’s how the process typically works:
1. Identify a Currency Pair: When shorting, you bet that the base currency (the first currency in the pair) will depreciate against the quote currency (the second currency). For example, if you’re shorting GBP/USD, you’re betting that the British pound will fall in value relative to the US dollar.
2. Sell the Base Currency: When you short a currency, you are borrowing the base currency to sell at the current market rate. This sale happens automatically on most trading platforms.
3. Wait for Depreciation: After selling the base currency, you wait for its value to decrease. You need to be confident that the currency will fall, or else you risk losing money.
4. Buy Back the Currency at a Lower Price: Once the value drops, you buy back the base currency at the lower price, closing the trade. The difference between the selling price and the repurchase price is your profit (or loss if the currency increases in value).
Here’s a quick table that summarises the steps:
| Step | Action |
|---|---|
| 1. Identify a Currency Pair | Choose a pair where you expect the base currency to fall |
| 2. Sell the Base Currency | Sell the base currency at the current market rate |
| 3. Wait for Depreciation | Monitor the market and wait for the base currency to fall |
| 4. Buy Back the Currency | Repurchase the base currency at a lower price |
Here’s My Experience:
One of the first successful currency shorts I made was during a period of political uncertainty in the UK, just before the 2016 Brexit vote.
The pound was fluctuating wildly, and based on the market sentiment and news analysis, I decided to short GBP/USD. Within days of the vote, the pound dropped sharply, and the profits I made were substantial.
However, the experience taught me : shorting is not without risks. Had the vote gone the other way, the pound could have surged, and my loss would have been equally significant.
How to Short a Currency (Step-by-Step Guide)
To successfully short a currency, it’s important to follow a structured approach. This section will guide you through the critical steps involved:
Step 1 – Research Currency Pairs
The first and arguably most important step is selecting the right currency pair. Each pair represents a unique economic relationship between two countries, and understanding the market forces at play is crucial.
Start with Major Pairs: As a beginner, it’s wise to start with major currency pairs like EUR/USD, GBP/USD, or USD/JPY. These pairs are highly liquid, meaning there’s a lot of activity, which helps you enter and exit trades with ease.
Look at Economic Indicators: Interest rates, inflation, and GDP growth. These metrics provide clues about the health of a currency’s economy. For example, if a country’s central bank is cutting interest rates, it could signal weakness, making it a good candidate for shorting.
Consider Political Stability: Political events, like elections or policy changes, often lead to significant currency fluctuations.
Step 2 – Perform Technical and Fundamental Analysis
The next step is to analyse the market. Both technical and fundamental analysis are key components of this process.
Technical Analysis: This involves analysing historical price data and using charts to predict future movements. Tools like moving averages, Bollinger Bands, and trend lines can help you identify when a currency is overbought or oversold. For example, if a currency pair consistently hits resistance levels and fails to break through, it could be a signal to go short.
Fundamental Analysis: This involves looking at economic reports, news, and financial data to evaluate the strength of a currency. If you believe a country’s economy is heading for a downturn, that currency may lose value, making it a good candidate for shorting.
Key Technical and Fundamental Analysis Tools
| Analysis Type | Key Tools | What to Look For |
|---|---|---|
| Technical | Moving Averages, RSI, Fibonacci Retracement | Trends and overbought/oversold conditions |
| Fundamental | GDP Growth, Inflation Rates, Central Bank Policies | Economic weakness or strength that might impact currency value |
Step 3 – Choose a Trading Strategy
There are different ways to short a currency, depending on your risk appetite and trading style. The most common methods are spread betting and CFDs (Contracts for Difference).
Spread Betting: With this method you speculate on the direction of a currency pair without owning the underlying asset. Your profit or loss depends on how far the market moves in your favor or against you. Spread betting is popular in the UK due to its tax-free profits for individual traders.
CFDs: With CFDs, you enter a contract to exchange the difference in the currency’s price from when you open the trade to when you close it. CFDs allow you to use leverage, which can amplify both profits and losses.
Step 4 – Open a Forex Trading Account
To execute short trades, you’ll need a trading account with a forex broker that offers the ability to short currency pairs. Here’s how to get started:
Step-by-Step to Opening an Account:
1. Choose a Broker: Research and select a broker that offers the Forex trading instruments you’re interested in.
2. Register an Account: Sign up with your personal details. You’ll need to provide identification and proof of address.
3. Verify Your Identity: Most brokers require ID verification to comply with regulations. This is typically done by uploading a scanned copy of your ID and a utility bill or bank statement.
4. Fund Your Account: Deposit the minimum trading capital into your account using your preferred payment method (bank transfer, credit card, etc.).
5. Start Trading: Once funded, you can start trading. Many brokers also offer demo accounts to practice without risking real money.
Why should I open a Demo Account?
Before diving in with real money, using a demo account is highly recommended. Demo accounts allow you to practice trading in a simulated environment with virtual funds. This helps you:
- Test your strategies without financial risk.
- Get comfortable with the trading platform’s interface.
- Learn how different markets react in real-time.
How Can I Manage Risk When Shorting a Currency?
Managing risk when shorting a currency is essential due to the volatility risks and high leverage involved in forex trading. To limit downside risk and protect against unexpected market shifts, always use risk-management tools like stop-loss orders to define your maximum loss and trailing stops to secure profits as trades move in your favour.
You can also set take-profit levels and price alerts around key support and resistance zones to manage your entry and exit points more effectively. Be cautious with leverage—using smaller ratios like 5:1 or 10:1 can help reduce your overall exposure to risk. Smart position sizing is also crucial—never risk more than 1–2% of your capital on a single trade.
Stay informed on economic news that can spike volatility. Diversifying across multiple currency pairs and sticking to a structured trading plan will help you navigate volatility and avoid emotion-driven decisions.
Risk Management Tools
| Tool | Purpose |
|---|---|
| Leverage | Amplifies exposure but increases potential loss |
| Stop-Loss Orders | Limits potential losses by closing positions automatically |
| Position Sizing | Helps control risk by managing the amount invested in each trade |
Example of Risk Management:
Suppose you short GBP/USD at 1.3330 with a 40-pip trailing stop. If GBP/USD drops to 1.3290, your stop-loss will automatically shift to 1.3310, locking in 20 pips of profit, while still allowing you to benefit from further downward movement.
Real-World Examples of Shorting a Currency
Below, we’ll look at two iconic moments in currency shorting history that showcase how this strategy works in practice.
Shorting the Pound Before Brexit
The 2016 Brexit referendum was a prime example of how political events can lead to massive fluctuations in currency markets. As the UK moved closer to the referendum date, uncertainty around its future in the European Union caused the pound to wobble.
Traders who anticipated that the vote would lead to the UK leaving the EU, and thus a sharp devaluation of the pound, made huge profits. One such example is George Soros, who famously shorted the pound prior to the vote.
- Scenario: In June 2016, GBP/USD was trading around 1.48, but following the referendum, it plummeted to 1.32 within a week.
- Potential Trade: If a trader had shorted GBP/USD at 1.48, expecting the pound to fall, they would have profited significantly as the pound dropped by around 1,600 pips in a very short time.
Andy Krieger and the New Zealand Dollar
One of the most legendary examples of shorting currency is Andy Krieger’s famous bet against the New Zealand dollar (NZD) in 1987. Krieger, a trader at Banker’s Trust, recognised that the NZD was significantly overvalued following the global stock market crash of “Black Monday.”
- Scenario: Krieger used aggressive shorting techniques to sell NZD to the point that his position was so large it exceeded the money supply of New Zealand. The pressure Krieger put on the NZD caused it to collapse rapidly, and he made his company hundreds of millions of dollars in profit.
- Takeaway: Krieger’s trade shows the importance of recognising when a currency is overbought and ripe for shorting. It also demonstrates the power of market sentiment and how traders can influence currency prices.
Advanced Strategies for Shorting Currency
Once you’ve mastered the basics of shorting currency, it’s time to dive into more advanced strategies that can help maximise your gains and manage risks in different market conditions.
Here are two key approaches: scalping and high-frequency trading and hedging risks with options and futures.
Scalping and High-Frequency Trading
Scalping is a strategy where traders aim to profit from small price movements over short periods. This can involve opening and closing multiple positions within minutes, sometimes even seconds. Scalpers rely on quick trades to accumulate incremental profits, which can add up over time.
- How It Works: Scalping requires constant monitoring of the market, as trades are usually made on minor price fluctuations. Traders often use technical indicators such as moving averages, Bollinger Bands, or RSI (Relative Strength Index) to identify entry and exit points.
- Currency Pair Selection: Scalping works best with highly liquid currency pairs, such as EUR/USD or GBP/USD, because liquidity ensures smaller spreads and more frequent price movements.
High-frequency trading (HFT) is an automated version of scalping that uses sophisticated algorithms to execute hundreds or thousands of trades in milliseconds. While HFT is typically used by institutional traders, individual traders can use automated systems or trading bots to take advantage of this approach.
- My Experience: When I first experimented with scalping, I found it to be a highly intense strategy that required discipline and focus. One of the biggest challenges was managing emotions, as rapid trades can tempt you to take unnecessary risks. However, the small, consistent gains were rewarding when combined with a solid exit strategy.
Hedging Risks with Options and Futures
Hedging is an advanced strategy used to protect against potential losses. In the context of forex trading, hedging involves using options or futures contracts to offset the risks of shorting currency.
Options: Options give you the right (but not the obligation) to buy or sell a currency at a specific price before a set expiration date. When shorting a currency, you can buy a put option to sell the currency at a higher price if the market doesn’t move in your favour.
For example, if you’re shorting EUR/USD and the euro starts to gain strength unexpectedly, holding a put option on the euro can limit your losses.
Futures: Futures contracts obligate you to buy or sell a currency at a predetermined price on a specific future date. This allows traders to lock in profits or hedge against unfavourable price movements. If you short a currency, you can use futures to guarantee the purchase price at a later date, reducing the risk of market volatility.
My Experience: Using futures to hedge short positions has helped me protect against market swings, especially during times of major political or economic events. One time, I shorted GBP/USD, but political news in the UK sent the pound unexpectedly higher. Fortunately, my futures contract mitigated a potentially large loss.
Hedging with Options vs. Futures Best Use Cases
| Hedging Tool | How It Works | Best Use Case |
|---|---|---|
| Options | Right (not obligation) to buy/sell at a set price | Flexibility in uncertain markets |
| Futures | Obligation to buy/sell at a set price | Lock in prices during volatile market period |
Final Thoughts on How to a Short Currency
When executed with proper planning, analysis, and risk management, shorting a currency can be highly rewarding. Whether you are using spread betting, CFDs, or another method, understanding the mechanics of the forex market and staying informed about economic events is crucial to success. Remember, success in forex trading is as much about protecting your capital as it is about making profits.
FAQs
Can I Short Currency Without Leverage?
Yes, you can short currency without leverage, but it requires more capital. Without leverage, your potential profits and losses are directly tied to the amount invested. While this reduces risk, it also limits the size of your returns compared to leveraged trades.
How Do Interest Rates Affect Currency Shorts?
Higher interest rates strengthen a currency, while lower rates weaken it. If a central bank raises rates, the currency may appreciate, negatively impacting short positions.. Monitoring central bank policies is crucial when shorting currencies.
Can beginners short currencies in forex?
Yes, beginners can short currencies, but it’s important to start small, use risk-management tools, and thoroughly understand concepts like leverage, volatility, and position sizing. Many brokers also offer demo accounts to practise without real money.
Which forex pairs are best for shorting?
Popular choices include major pairs like EUR/USD, GBP/USD, USD/JPY, and AUD/USD due to their liquidity and tighter spreads. The “best” pair depends on market conditions and your analysis—look for clear trends, economic catalysts, and technical signals.
Do I need a special account to short currencies?
No, most standard forex trading accounts allow you to go both long and short. Just make sure your broker offers the currency pairs you’re interested in and supports features like stop-loss and take-profit orders.
What are the risks of shorting a currency?
Shorting involves high downside risk, especially if the market moves sharply against your position. Since there’s no limit to how much a currency can appreciate, your losses could be significant. That’s why stop-losses and leverage control are so critical.
References
- Investor.gov – Foreign Currency Exchange (Forex) Trading for Individual Investors
- CFTC – Customer Advisory: Eight Things You Should Know Before Trading Forex
- CFTC – Foreign Currency Trading
- SEC – Foreign Currency Transactions
- Investor.gov – Understanding Forex Trading Risks
- DailyFX – Economic Calendar
- FCA (Financial Conduct Authority) – Understanding CFDs and Forex
- TradingView – Real-Time Forex Charts
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