When used in trading, short refers to a position that makes a profit if an asset’s price decreases.

Usually used in context as “going short” or “taking a short position” or “selling”.

Shorting Forex

When you trade in the forex market, since you buy or sell in currency pairs, “going short” means that you are selling the base currency and buying the quote currency.

Here’s how it works:

  1. You anticipate that the value of a certain currency will decline against another currency in the future.
  2. You sell a currency pair, which means you’re selling the base currency (the first currency in the pair) and buying the quote currency (the second currency in the pair).
  3. If your prediction is correct and the base currency depreciates against the quote currency, you can then buy back the currency pair at a lower price.
  4. The difference between the price at which you initially sold the currency pair and the price at which you bought it back represents your profit.

For example, suppose you expect that the EUR will depreciate against the USD.

This means that you are expecting the EUR/USD currency pair to fall.

You decide to sell (go short on) the EUR/USD pair at 1.2000.

Now, let’s say your prediction is correct and the rate falls to 1.1900. You can then buy back the EUR/USD pair at this lower price.

Since you sold at 1.2000 and bought back at 1.1900, the difference of 0.0100 (commonly referred to as 100 pips in forex trading) is your profit.

However, it’s essential to remember that if the base currency appreciates against the quote currency (i.e., the price of the currency pair rises), you will make a loss.

This is because you will be buying back the pair at a higher price than what you sold it for.

Shorting Stocks

“Shorting” or “going short” when trading stocks refers to the act of selling a stock that you do not currently own, with the expectation that its price will decline in the future, enabling you to buy it back at a lower price and profit from the difference.

Here’s how it works in a step-by-step process:

  1. You believe the price of a stock will decline in the future.
  2. You borrow the asset from a broker and immediately sell it in the market at its current price.
  3. If your prediction is correct and the price of the asset declines, you then buy back the asset in the market at the lower price.
  4. You return the borrowed asset to the broker.
  5. The difference between the price at which you initially sold the asset and the price at which you bought it back represents your profit.

For example, you believe that the price of stock XYZ, currently trading at $50 per share, is going to decrease.

You borrow 100 shares and immediately sell them for a total of $5,000.

Later, the price of XYZ indeed falls to $40 per share. You then buy back 100 shares for $4,000 and return them to the broker.

The difference of $1,000 ($5,000 – $4,000) is your profit, excluding any fees or interest charged by the broker for the loan.

As in all trading strategies, shorting involves risks and requires a solid understanding of the market and careful risk management.