Short

Short refers to a strategy where a trader profits from a decline in the price of an asset. This is typically referred to as "going short," "taking a short position," or simply "selling."

In a short position, a trader borrows the asset (like a stock or currency) and sells it at the current market price, with the expectation that the price will decrease. If the price drops, the trader can then buy back the asset at the lower price, return it to the lender, and pocket the difference as profit.

It’s a common strategy in both stock markets and forex markets, though it requires careful risk management, as losses can be significant if the asset's price rises instead of falling.

Here’s how shorting works in trading:

1. Anticipation: trader predicts that the value of an asset (whether it is a currency or stock) will fall in the future;

2. Borrow and sell: In the case of forex, they sell the base currency and buy the quote currency, or in the case of stocks, they borrow shares and sell them at the current market price.

3. Buy back at a lower price: if the prediction is correct and the price of the asset decreases, trader can then buy it back at the lower price;

4. Return to lender and profit: trader returns the borrowed asset (the currency or stock) to the lender, and the difference between the price you initially sold it for and the price they bought it back at is the profit.

Let’s say a trader believes the EUR will decline against the USD, so they sell the EUR/USD pair at 1.2000. If the pair then drops to 1.1900, they buy it back at the lower price, making a profit of 0.0100 or 100 pips.

However, if the base currency appreciates (i.e., the price rises), the trader will incur a loss because they will have to buy back the pair at a higher price than what they sold it for.

Just like any trading strategy, shorting carries inherent risks. If the price of the asset does not decline as expected and instead rises, traders could face significant losses. Since there's no limit to how high a price can go, the potential losses can be unlimited.

To minimize these risks, it is crucial to have a solid understanding of market conditions, use proper risk management techniques (like stop-loss orders), and carefully monitor the positions. Effective risk management is key to protecting the capital and making informed trading decisions.