Yesterday we traced exactly what happens when you make a BUYING trade in Forex trading ("going long"). Today we will turn it the other way round and look at a SELLING trade - "going short".
You take a SELL position, or go short, on a currency pair if you believe EITHER that the base currency will fall against the quote currency, OR that the quote currency will rise against the base currency. You use your methods of Technical Analysis and/or Fundamental Analysis to come to this conclusion.
Take the Currency Pair USD/JPY. You see that the price at this particular moment is:
USD/JPY 104.41/104.45
This means that at this moment you can sell 1 US dollar for 104.411 Japanese Yen or buy 1 US dollar for 104.45 Yen.
Because you believe that the dollar is going to fall against the Yen, you take a SELL position. You might sell $100.000 USD, simultaneously buying 10,410,000 Yen. At a 1:100 margin, your initial margin deposit would be only $1000.
Then you wait for the dollar price to fall. As you expected, the USD/JPY pair falls to 103.41/103.45. This means you can now buy 1 USD for 103.45 Yen and sell 1 USD for 103.41 Yen. You now buy dollars and sell back your Yen to make your profit. If you buy $100,000 USD at the current rate of 103.45, it now costs you 10,345,000 Yen. Since you bought 10,410,000 Yen, you have made a profit of 65,000 Yen. Use the currency exchange to see what this is in dollars.
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