Riding the Forex Short
The foreign exchange market, or forex, involves the simultaneous buying and selling of a currency pair. Currency prices in this market constantly go up and down, and up and down again. Traders ride the forex to profit from this constant motion. The key is to make the right move at the right time during the ride. So when prices are expected to go down, taking the forex short is the ticket to profit.
A currency pair is composed of the base currency (the first currency) and the counter currency (the second currency). Traders are said to be in the "short position" when they sell their base and simultaneously buy the counter currency before the price will expectantly trend down. They put themselves in the short position where they have more of the counter's value with respect to the base currency.
Now, it's not a secret that the foreign exchange market allows a trade called "short selling". This is the act of profiting from a short position by buying back currency when its price goes down and before it trends back up again. In effect, you buy the base cheaper with more of the counter currency to simultaneously sell, making you a profit.
The tricky part of short selling is buying the base before it goes back up again. And when traders in the short position scurry to buy back currency to cover their positions, their collective actions can bring about a temporary event called a "short squeeze".
A short squeeze is the quick rise in prices because more traders are buying the currency at the same time. Because the points when a short trader can earn a profit, break-even and incur a loss are very close to each other, a short squeeze can occur almost immediately. Rather than seeing an anticipated increase, a momentary boost in price is a detriment to those who intend to make profit from the short position.
Riding the forex short is a straightforward ride but requires a keen sense of predicting when prices will eventually go up. Making a profit from decreasing prices, as with its more familiar counterpart, takes knowing when to simultaneous buy and sell your currency pair. Take a short position to prepare for your short selling order. When prices decrease, buy back your base and simultaneously sell your counter currency before prices increase again. Don't let a short squeeze ruin your profiting opportunity by making swift trades to cover your short position in the foreign exchange market.
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