A short position is a bet that the price of an asset will fall. To enter a short position, you borrow an asset from your broker—typically a currency pair—sell it at the current price, and aim to buy it back later at a lower price. The difference between the selling and buying price, minus interest charges and fees, is your profit.
How Short Positions Work
Example: you short EUR/USD at 1.1000, expecting it to decline. You borrow the pair from your broker and sell it. If the price falls to 1.0900, you buy it back and return it, locking in a 100-pip gain (minus borrowing costs). Your broker charges interest daily on the borrowed asset, added to your costs.
Risk vs. Reward
While a long position—buying first, selling later—limits your risk to your initial investment, a short position has theoretically unlimited risk. If the price rises instead of falling, you must buy back at an increasingly higher price. A rapid price spike can force you to close at a substantial loss. Short positions require strict stop-loss discipline and a clear exit plan.
When Traders Use Shorts
Short positions are valuable for hedging a long portfolio or profiting in declining markets, especially during economic uncertainty or negative sentiment toward a currency pair.
