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However, did you know that you can also make a profit when prices fall? Short-selling refers to the practice of borrowing financial instruments from your broker and selling them at the current market price, with the anticipation of lower prices in the future. The trader would make a profit equal to the difference of the selling price when prices are higher and the buying price when prices are lower. If the analysis is correct, a trader can make money both in bull markets and bear markets, which is the main advantage of short-selling.
The price of an instrument can only fall to zero, but the upside potential is basically unlimited. Short-selling is different. On the other hand, risks are theoretically unlimited as the price can skyrocket. This is the main reason why beginner traders hesitate to short in the financial markets. Having strict risk management rules in place is a must when short-selling the market. There are eight major currencies on the Forex market which are heavily traded on a daily basis.
However, to trade on the Forex market, traders are dealing with currency pairs and not with individual currencies, because the price of each currency is quoted in terms of a counter-currency. The first currency in a currency pair is called the base currency and the second currency is called the counter-currency. A rising exchange rate signals any of the following scenarios:.
Read those four points as many times as needed until you fully understand this concept. You need to know what is going on with the base and counter-currencies of a pair when short-selling on the Forex market. Currency indices can do a great job in determining what currency is appreciating and what is depreciating. For example, take a look at the Dollar index DXY , which shows the value of the US dollar relative to a basket of six major currencies which have the largest share in the US trade balance.
The following chart shows the US dollar index on the daily timeframe. A bullish candle shows that the US dollar was outperforming most other major currencies that day, while a bearish candle shows a relatively weak greenback. Finally, currency pairs are usually traded in lots. One lot represents , units of the base currency. Shorting on Forex is perfectly possible and many traders do it on a regular basis. Unlike on the stock market, risks associated with shorting on Forex are relatively limited because of the inter-relation of currencies in a currency pair.
For an exchange rate to go through the roof, there needs to be dramatic changes in the current market environment. Similarly, the downside potential of an exchange rate is also limited. However, Black Swan events unexpected events with severe and long-lasting impact do happen from time to time on the Forex market and are a nightmare for traders.
This led to dramatic losses to many market participants who were short on the franc. Another good example is the Brexit vote in When shorting on the Forex market, you also need to be aware of the rollover and financing costs which can decrease your potential profits. That said, you will earn interest payments on the funding currency. How to determine which currencies to short and which not to?
As you already know, the best currencies to short are those which have the highest chance of losing value in the coming period. Currency pairs that have formed reversal chart patterns on the daily chart during uptrends could be good candidates to short. Popular reversal chart patterns include:.
You can also short currency pairs that have formed continuation chart patterns during downtrends, such as bearish wedges and triangle and rectangle breakouts to the downside. Fibonacci levels also offer an excellent opportunity to enter into a short position if the price rejects an important Fib level, signalling that a downtrend is about to continue. Rejections of the Some traders like to use fundamental analysis to find good candidates for shorting.
Currencies that have a high chance of a rate cut for example, because of weak economic growth, rising unemployment levels or weak inflation are good to short-sell. Capital flows to currencies which have the highest interest rates, causing low-yielding currencies to depreciate and high-yielding currencies to appreciate.
Finally, political and economic turmoil, especially in emerging market countries, often cause a depreciation of the domestic currency. Despite being the largest, most liquid and most traded market in the world, there are times at which you should stand on the sidelines. The Forex market is an over-the-counter market that trades during trading sessions, which are basically large financial centres where the majority of the daily Forex transactions take place.
Recently, Singapore and Hong Kong have also become big players in the currency market. The New York session, also called the US session, is a heavily traded session during which major US economic reports are published. After the London session, the New York session is the most liquid of all Forex trading sessions with a high number of buyers and sellers available for all major currencies.
The London session is the largest European session and the most liquid trading session of all. The geographic location of London, being in between east and west, allows traders from both the US and Asia to trade during the London open market hours. The few hours during which the New York and the London sessions overlap represent the most-liquid and most-traded hours of all.
Asian currencies, such as the Japanese yen, Australian dollar, and New Zealand dollar are heavily traded during those sessions. This makes it relatively safe to short those currencies against other majors. Avoid short-selling during these times:. Of all the trading types, short term trading is the most likely to test your agility, focus, and reflexes. Past performance is not necessarily an indication of future performance.
When trading Forex short term, you have to employ both technical analysis and fundamental analysis. Learning to use technical and fundamental analysis is essential, no matter which short term Forex strategies you eventually use. While there is no definitive answer to what the best short term Forex trading strategy is, the most widely used is scalping. First off, scalping is a test of your character. This short term Forex strategy demands long sitting sessions, and intense concentration.
The hours spent sitting may have a negative impact on reflexes, but for a professional scalper, losing focus means losing potential profit. When you use a scalping strategy, you place multiple orders and remain in trades for a few seconds, and then leave the position as soon as you gain a few pips. While the profit from scalping may seem small, so are the potential losses. Usually, scalpers use either one-minute M1 or five-minute M5 charts.
Within this time frame, you can expect to generate two to five pips of losses and five to nine pips of profit. With high enough transaction volume and time, these few pips add up. When you're scalping, you need to keep an eye on the latest economic news to correctly predict the next increase in the market's volatility. You have to get used to fast-paced trades and taking action on the fly. If you would like to keep track of all the upcoming economic announcements, why not check out our Forex calendar?
Scalping is all about being in the right place, at the right time. Additionally, you have to keep two main things in mind. First of all, you have to know your broker. You'll want a broker that supplies you with the best possible execution. You cannot scalp when your orders go through a dealing desk, so your broker should definitely offer one of the following two executions:. Both also charge a very small commission for trading. For example, Admirals can supply you with a STP execution account.
Second on your priority radar should be the spread. The spread is the difference between an asset's bid and ask price. It does not remain the same throughout the day, and will constantly keep changing. If you want to become a professional scalper, you need to learn to use the spread to your advantage. The higher the price you have to pay, the more pips you need to gain in order to make profit. If you're aiming to take your trading to the next level, the Admirals live account is the perfect place for you to do that!
Trade the right way, open your live account now by clicking the banner below! How successful your short term currency trading is will depend on the volume of your transactions. Speed is what matters, which is why a currency pair with low volatility can put your efforts to a grinding halt. You have to remember that even though Forex markets are trading almost around the clock, the volume of transactions is not consistent. It usually picks up when the major Forex centers open.
Now, here comes the basic math of trading: the average made on one pip for trading one lot is 10 USD. If your broker asks for a three-pip spread, that would put you at a 30 USD loss right away. When you purchase an asset and the market has not moved yet, you can only get rid of the asset for the lower price. In short, you need the price to move up three pips to break even.
If you are looking for a five-pip gain per trade, you would actually have to go up 8 pips from your starting price. That's why you want to scalp pairs where the spread is small. For example, Admirals offers competitive spreads ranging from 0. This way, you can plan out your short term currency trading strategies without worrying too much about the cost of trading.
A common pitfall in short term trading is to avoid closing positions, because you are expecting them to improve. While this may happen in theory, in reality this behaviour is the fastest way to drain your account. Instead of closing positions manually, you can set up a stop-loss. A stop-loss sets a specific level for your position, and automatically closes it when the exchange rate reaches that level. A stop-loss is a defensive mechanism, that limits your losses and minimises your risks.
It's important to remember that scalping may not be the best short term Forex trading strategy thats works for you, as it requires a lot of time and attention within the day. But that doesn't mean you can't get value out of it. Short term Forex trading is generally very educational, and a good way to kick-start your trading career. It can provide a good overview of indicators and signals, and it can also teach you how to act fast. However, you should make sure you go at your own pace and test everything you know on a demo account first, before transitioning to a live account.
With a demo account, the temptation might be to trade in high volumes right away. In fact, the first mistake many beginner traders make is to consider their demo trading losses as unimportant. Aside from helping you to develop a short term currency trading strategy, demo trading can also help you to answer the questions you might not have asked otherwise. For instance: How well do you handle losses? How quick are you on your feet?
What do you do when you have to make a judgement call?
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