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Forex Trading Strategy

Forex Trading Strategy: Get Short

When you first start forex trading, it may seem strange or even wrong to bet against the value of foreign currencies. It's best to get beyond this stage as quickly as possible, because it can be amazingly profitable to get short on certain currencies at certain times.

If you have any questions on that score, consult the biography of George Soros, who made upwards of $10 billion dollars shorting the GBP/USD in the early nineteen nineties. Truly, getting short is a potential goldmine for a forex trader.

However, in order to understand when to sell short, we must examine individual short-sell currency trading strategies in more detail.

The Failure Play

On the topic of Soros, lets talk about The Failure Play, a primary forex trading strategy that exploits the power and velocity of getting short of a failing currency.

When currencies fall in value, people start to panic. The Failure Play is based upon finding and recognizing key "structure points" in the price of a currency that, when violated, create this sense of panic. Identifying such key price levels may entail looking at a long term chart of up to twenty years in duration.

When a country's currency value decreases below a historical price level, a “rush to the exits” mentality threatens to overwhelm the markets. If you are short that currency at that time, you have a chance to reap profits for months or maybe even years.

If things do not turn out to be all that dire, you can place a stop-loss order that should get you out of the position with minimal risk. The Failure Play is one of those forex trading strategies that when it work, it really works, and when it doesn’t work, it’s not that bad.

Short-Selling on Retracement

When a currency starts trending downward it will frequently jump back up some portion of the downward move. That is your chance to get short.

If you get short during a temporary upward blip, you can build a position that is in line with the general trend while not “paying up” to get into the deal. Fibonacci percentages are commonly used by forex traders as guidance for spotting these retracement opportunities.

At the very least, you should be careful about selling a currency when everybody else is selling it too. This is a sure fire recipe for losing money in the forex markets. Wait for the retracement and grab your position accordingly.

Short-Selling as a Form of Hedging

Besides the specific currency shorting strategies discussed above, you must consider the value of hedging your risk. The forex markets allow unprecedented access to hedging strategies.

For example, let’s say that you take a short position on the EUR/USD out of the belief that the Euro is overrated. You might be wrong. Or you might be right, but the dollar is dying like a dog as well, so the EUR/USD actually moves higher.

This is when hedging might save the day. Taking a short position in USD/CAD could help you eliminate or at least mitigate the risk associated with your EUR/USD position. Under this scenario, the dollar could fall, hurting your short EUR/USD position but helping your USD/CAD position.

These are just a few of the forex trading strategies that take advantage of the short selling–friendly environment of the currency markets. There are many more that you can use when trading currencies through brokers like EToro USA.

The important point to realize is that getting short, done right, is not wrong, but rather it is incredibly right.

Important Forex Information

The most important step in currency trading is finding the right broker; our forex experts can help. See our
reviews of forex brokers for more information.  

The earlier you can start building a forex trading system that works for you, the better off you will be when trading the markets. Learn to build forex trading systems.  

In order to understand when to sell short in the forex market, we must examine individual currency short selling strategies. Learn the strategy of short selling currencies.  

While it is true that the bigger your position, the more you can benefit from utilizing the carry trade forex strategy, smaller investors can beneit, too. Read about the carry trade.