EURUSD 1.1773 USDJPY 112.16 USDCAD 1.2386 EURCZK 26.034 USDCZK 22.108 EURPLN 4.2869 USDPLN 3.6413
EURUSD 1.1773 USDJPY 112.16 USDCAD 1.2386 EURCZK 26.034 USDCZK 22.108 EURPLN 4.2869 USDPLN 3.6413

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A short position on the market is the case of a trader who achieves gains from the fall of a market price

Rule of thumb

Contracts for Difference allow  trading in both directions – take advantage of rising markets (with a long position), or pursue profits on bear markets (with a short position)

In the previous section we  analysed the case when the trader expects  gains from  rising markets. As  markets may move in both directions, we will assume the opposite situation - where the trader expects the price to fall.

 

Let us consider the case where the trader expects that in the future the price of the US dollar quoted in Japanese yens will be lower, and he/she would like to take advantage of it. In order to do so,  you would consider a short position – that assumes the sale of the given asset at the current market price, and buying it back in the future at a lower price rate (hopefully).

  

The common mistake is to associate the term „short position” with the time horizon of the transaction. While this can be misleading, it is important to remember that “short position” refers to the direction of the trade - selling the asset first and then gaining profits when the market falls, and losing when the opposite happens.

  

The idea of selling an asset that is not actually owned may appear a bit strange at first, it is just an opposite transaction to taking the long position. Whenever an investor is taking a long position on the CFD market, there is always someone on the other side of the transaction who takes the opposite position – namely short position. As there is no physical delivery, what is settled is just the difference between the opening and closing prices of each trade. It is easier to understand when looking at the figures in the following example:

 

Example A

An investor expects the price of gold to fall down in the coming hours - for whatever reason. He/she sells 1 contract for GOLD, and according to the Financial Instruments Table, one contract for GOLD has a nominal value of 100 ounces. The current price is 1100 USD.

 

On the same day, the price falls to 1080 USD. The investor closes the position at that price. Financial result?

 

Financial result = (1100 – 1080) * 100 = 20 * 100 = 2000 USD

 

Assuming that the account is in CZK, and the USDCZK rate is 20, the result is equal to 40 000 CZK.

 

Example B

What happens in the opposite situation, when the price does not behave according to expectations?

 

The investor sold 1 contract for GOLD, for 100 ounces at  a price of 1100 USD. The price however went up to the level of 1120 USD. The investor decided to close the position. The financial result?

 

Financial result = (1100 – 1120) * 100 = -20 * 100 = -2000 USD

 

Assuming that the USDCZK rate is 20, it is equal to -40 000 CZK.

 

If you would like to learn how to make a transaction in practice, using your MetaTrader 5 platform, you can take a look at the Basics of transactions making section of our website. 

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