In today's tutorial we will discuss in great detail the topic all short-selling many traders, especially beginners on the Forex market ...
In today's tutorial we will discuss in great detail the topic all short-selling many traders, especially beginners on the Forex market find short-selling rather confusing and that is why I will specifically try to walk in your shoes today and be as explicit as I can when talking about short selling, so let's jump straight into as we've already established there two types of traders on the Forex market rules. Traders who invest in growth will Forex currency and bears who invest in the decline of a Forex currency.
So today we talk about short selling and that is applicable to bears. This look at our euro use dollar example in more detail.
So here's a chart and how would a bearish type of trader profit from this downward trend. Well, there's a trend and a bearish trader would enter somewhere over there with the Lucida X on the top left he would sell at about 1.3140 and as we recall.
That means that every one euro is worth US$1.3140, and then he would close the transaction at about 1.2480, meaning that at that point in time, every euro is worth only US$1.2480.
So as we did previously. Let's simplify this example by talking about apples and now let's look at the mechanics of how all this comes together will, first of all, we don't have apples.
We know that on our account. We have American dollars but we don't have apples.
How can we sell something that we don't have? So how does that work well? This is why this transaction is called, not just selling but the proper name for it is short selling, it's because you are selling something that you don't actually own and the way it works in the Forex market is you as a trader you approach your broker and all of this is done automatically so you don't have to think about it at all, but this is what happens in the background when you click that sell button in your trading platform so you as a broker, a user trader approach a broker and you borrow apples from your broker.
So let's say for instance you borrowed 500 apples on the number of apples you can borrow is underpinned by the actual amount of money you have on your account because you have to guarantee that you will return these apples no matter what. So you borrow 500 apples from your broker and you then take these apples to the Forex market, and you sell them at $1.3140 per Apple and then gives you in return of US$657. So now you have that money and you decide to hold onto the US$657 because he predicted that the price of four apples will drop and you wait for that to happen.
As per our chart which we looked at earlier. So once a price for apples drops and it hits about 1.2480 American dollars per Apple.
Guess what, you still have those $657 that you got in exchange for apple a couple of days or weeks earlier. So what are you going to do with the $657?
Now, what are you going to go and you going to buy back apples now with your $657 you can buy 526 apples.
So as you remember, you still have to return 500 apples to your broker and that's exactly what you do return 502 brokers and that means you still have 26 apples of profit in your hands because of this transaction.
You left with an extra 26 apples. I know what you do with these 26 apples is you convert them back into US dollars at the exchange rate at the time and that basically means that now you have a profit of 32 he was dollars.
Now if we replace apples with euros as we did previously. You will see that nothing changes that this whole scheme works also for euros, just as it did for apples to go to broker you borrow €500 you sell them at 1.31404 US$657 you hold onto €657 dollars into the price for yours drops you use those $657 to buy back euros at the new lower price of 1.2480.
You get €526 in return, you return €500 to broker your profit is €26 because your account is in US dollars.
You convert your euros back into your dollars and you have 32 years dollar profit.
So that's in a nutshell, all short selling works. You may find slightly varying explanations for the stock market and that's because you're dealing with from stocks and ownership rights to a company but in the Forex market.
These are actual transactions with actual money and this is how short selling works in the Forex market.
Also, as we discussed previously. The first transaction over there is cold selling on its short for short selling but and everybody is so used to just think selling on the Forex market that they no longer use the combinational were short selling so will just stick to selling from non-and the loss transaction over there is cold closings.
So as you can see it's not that complicated. The concept itself is a bit different to buying, but the Forex market has been around for so long and the procedures in place in any brokerage company are so standardized that you will not even see a difference.
The mechanics of different but the way you conduct a by the transaction is identical to the way you conduct a cell transaction and the way these things work in the background.
They don't even charge an extra commission for boring those €500. And finally, before you finish this tutorial I would like to point out that just as with buying with selling.
You can use leverage to achieve much better results from your traits and this is something that will discuss in the future tutorial when we talk more about leverage and thank you for your attention. I look forward to seeing you next time. Until then, happy trading
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