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Q&A: What does it mean to "short" a currency?

Question

What does it mean to "short" a currency?

Dear Joshua, you recently posted the following: https://www.jrwinvestments.com/blog/currencies/doubling-down-on-my-euro-short/

In it you write "Over a good portion of last week I materially increased my short position in the Euro (basically doubling down)." Does that mean you borrowed additional shares of stock from the brokerage pool and sold them, planning to buy what you borrowed after the price drops?

Answer

Not exactly. Had this been stock, then the answer would be yes. But this is currency trade, so what I actually did was I sold thousands of Euros and used the proceeds to buy thousands of US Dollars, expecting that the exchange rate between the EUR and USD to change such that the USD would strengthen against the EUR. If the USD strengthens against the EUR and if I want to take my profits, I can then buy back the Euros I sold with US dollars (thus closing out the trade). I will make a profit spread since it now takes fewer US Dollars to buy back the same number of Euros. I will keep the difference which represents my profit.

It is the same concept as paying for importing goods on a foreign trade with different currencies, but instead of goods acting as the medium of trade between currencies, the currencies themselves are traded directly.


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currency trading, EUR/USD, Euro, Forex, Short, US Dollar

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