What is going Short aka opening a Short Position?

What is going Short aka opening a Short Position?

Short selling or shorting in financial trading refers to the activity of selling an asset at a certain price and time. In Forex trading, shorting means selling the currency pairs for profits. Different types of short-selling methods are employed by traders depending on market conditions and trading strategies. In the guide below, we will explain short selling and provide simple trading strategies.

Understanding Short Selling

Shorting means to sell an asset be it a Forex currency pair, stock, or any other financial market. It is an industry-specific slang for financial markets and financial trading. 


Visualization of the shorting process in FX.

When a trader shorts a Forex pair, they just sell it for the current price in case of a market order or at the predetermined price in case of a pending order. 

Mechanics of Opening a Short Position

While it is simple for the trader to initiate a short-selling transaction, the underlying mechanics are complex and involve several procedures. The basic mechanics of shorting are simple, traders request a short trade to their broker, and brokers then route the trader’s short selling order to liquidity providers where the order is executed. This process is usually automatic and takes milliseconds to complete. Modern technologies make it possible to initiate short selling and buying orders right away with extremely short delays. This is why high-frequency trading is so popular these days. However, high-frequency trading is expensive, and oftentimes retail clients experience much slower execution speeds usually under a second. 

Risks and Rewards of Going Short

Depending on the trading strategy and market conditions, risks and rewards may vary for short-selling positions. For example, scalpers enter and exit short positions in a matter of minutes, while day traders and swing traders may wait for days before they close their positions. This diversity in short selling means the risks and rewards are different. Scalpers usually aim for extremely short profits of a few pips and day traders and swing traders target much larger profits. 

General tips for safe short-selling

No matter what strategy traders are employing there are several basic tips for every short-selling trader out there. 

Do not sell during the bullish trends


Avoid selling when there is a bullish trend, aka the uptrend. Uptrends tend to continue and they will eliminate all short positions along the way. When there is a strong uptrend, short selling is the last thing to do. 

Do not sell during lower swings or higher lows


Avoid selling on the bottom prices, or bearish price swings. If the price is making higher lows, it may indicate an upcoming uptrend which is not the time for the short selling.

Try to sell after lower highs


Bear markets are characterized by lower highs and lower lows. Lower highs are the best spot to initiate short-selling positions as the chances of prices going lower are higher. They indicate that there was not enough buying pressure to swing the price above the previous high indicating a stronger downward momentum. 

Strategies for Going Short

The simplest short-selling trading strategy in Forex and stocks would be the bearish breakdown strategy. In this method, the trader tries to identify a bearish trend and capitalizes on down movements. 

The steps are simple: identify an asset in a downtrend, and wait for a clear support level to break. A support level is the recent lower swing level where the price could not move lower. Short sell when the price drops below support. It is preferable to wait for the price to test this support level and turn downward. Place stop loss to manage the risks slightly above the support level. 


Another popular strategy is to use moving averages when they cross down entering a short position. However, this strategy is very risky and requires additional indicators to increase the chances of success. The best way would be to combine these two strategies into one complete method which will have a higher chance of success. Now, this is just an example to visualize what short-selling looks like and how traders might use several factors to initiate a safer short-selling trade. Every trader must test the strategy thoroughly before they start actual trading.