Short position
Also called Short, Short trade, Going short, Sell position, Short sale
A short position is a trade you open by selling first. It gains when the price falls, loses when the price rises, and you close it by buying back the same amount.
Because a rising price hurts you, your stop loss goes above your entry, not below it. Price has no upper limit, so without a stop there is no ceiling on the loss.
Why traders go short: falling prices and hedges
The first reason is to profit from a fall. If you expect a pair or a stock to drop, a short lets you earn from that move. You don't have to sit out a downtrend waiting for it to end.
The second reason is to hedge, which means opening a trade that offsets another one. Say you hold a long you don't want to close yet. A short on the same or a closely linked instrument gains while the long loses, so a drop hurts you less.
In forex, a short is also a bet on the other currency. Selling EURUSD means you expect the euro to weaken against the dollar, which is the same as expecting the dollar to strengthen against the euro.
Short position vs long position: one trade, opposite direction
A short is a long position turned around. The table compares the two on the points that affect your money.
| Long position | Short position | |
|---|---|---|
| You open it with | A buy | A sell |
| You close it with | A sell | A buy |
| Stop loss sits | Below entry | Above entry |
| Worst case in theory | Capped: price can only fall to zero | No cap: price can keep rising |
In stocks, short selling means you borrow shares from your broker, sell them, then buy them back later to return them. While you hold the short, you pay a borrow fee, and you pay any dividend the stock pays out. In forex and in CFDs (contracts for difference, which pay you the price change without you owning the asset) there is no borrowing step. When you sell EURUSD, you sell euros and buy dollars at the same moment, and that sale is your short.
What a short position does to your profit and loss
The figures here are an illustrative example. You sell 1 standard lot, the standard trade size of 100,000 units, of EURUSD at 1.1000. A pip is the fourth decimal in EURUSD (0.0001). On a USD-quoted pair, 1 pip on a standard lot is worth $10. You put your stop loss at 1.1030 and your take profit 50 pips lower, at 1.0950.
In the chart below, price first moves up against the trade but stays under the stop. Then it falls until the chart shows 1.0948, where the buy-back price reaches the 1.0950 target and the short closes.
A short makes money from the gap between the higher selling price and the lower buy-back price. You can work it out step by step. The spread is already counted, because you sold at the bid and bought back at the ask:
Now suppose price rises to the stop instead. That is 30 pips against you, so the loss is 30 × $10 = $300. This plan risks $300 to make a possible $500. The arithmetic is the same either way. Only the direction of the move decides whether you gain or lose.
The chart below puts both outcomes on one line. Profit grows as price falls toward the target, and the stop holds the loss at $300. The dashed line shows what happens without a stop: the loss keeps growing as long as price rises.
Three ways to open a short: sell now, sell limit, sell stop
You can open a short at today's price or leave an order that waits for a level. The choice depends on where you think the short makes sense.
| Order type | Where the level sits vs current price | When to use it |
|---|---|---|
| Sell at market | At the current bid | Your reason to short is already in place |
| Sell limit | Above the current price | You want to short a rally into resistance |
| Sell stop | Below the current price | You want to short only once support breaks |
Decision rule: if you expect price to bounce up first and then fail, use a sell limit. If you only trust the short once price proves weak, use a sell stop.
A common misread: placing a sell limit below price to short a breakdown. It fills at once at market, or gets rejected. If your sell order fills instantly, you used a sell limit where you needed a sell stop.
Bid, ask and your short: why a stop can trigger before the chart touches it
You sell at the bid, the lower of the two quoted prices, and buy back at the ask, the higher one. The gap between them is the spread. Most charts plot the bid, so the line you watch is not the price that closes your short.
A stop loss on a short triggers when the ask reaches it. With the same illustrative prices, if your stop is at 1.1030 and the spread is 2 pips, it fires when the bid on your chart reaches 1.1028. The figure below shows that moment.
The same applies to your take profit: with a 2-pip spread, a 1.0950 target fills only when the chart shows about 1.0948, which is where the example chart above buys back.
If you want the stop beyond a chart level, set it above that level by at least the current spread. Add more room around news releases and the daily rollover, the moment each day when open trades are carried into the next trading day, because spreads often widen then.
Checks before you open a short position
- Stop placement: put the stop at the price where your idea is wrong, plus the spread buffer covered above.
- Risk per trade: the loss to your stop is your risk. Size the trade from it: lots = money at risk ÷ (stop distance in pips × pip value per lot). Risking $200 with a 40-pip stop on a $10-per-pip pair gives $200 ÷ (40 × $10) = 0.5 lots.
- Margin, a separate check: opening the short locks up its own required margin, the deposit your broker holds while the trade is open. That amount has nothing to do with your stop distance. The money left over is your free margin, and an open loss eats into it. A margin call is only a warning. Positions are closed when your margin level (your equity divided by the margin in use, as a percentage) falls to the broker's stop-out level, the margin level at which the broker starts closing your trades. That can happen before price reaches your stop. If the loss at your stop would bring you near that level, trade fewer lots.
- Swap: the swap is the interest credit or charge for holding a trade overnight. Check it for the sell side. It depends on the interest rate gap between the two currencies, and it may be a cost or a credit.
- Restrictions: a stock can become close-only or unavailable to short when the broker cannot borrow shares, and some markets limit new shorts during sharp falls. Check with your broker that new sells are allowed on that instrument before you plan the trade.
FAQ
What happens to my short if price gaps above my stop?
A stop becomes an order to buy at the next available price. If the market opens or jumps above your stop, you are filled at that higher price, and the loss is bigger than you planned. As a rule of thumb, not a broker figure: size the trade so that a gap of twice your stop distance would still be a loss you can accept.
Why did my short lose money overnight even though price didn't move?
Usually the swap. It is a credit or a debit applied for each night you hold the short, and many platforms charge it three times on one day each week to cover the weekend. Your open short is also valued at the ask, the price you would buy back at. If the spread widens at rollover, the ask rises and you see a floating loss even when the bid on your chart hasn't moved.
Can I hold a long and a short on the same pair at the same time?
Only on accounts that allow hedging. On a netting account, which keeps just one combined position per pair, a sell against an open buy reduces or closes that buy instead of opening a separate short. Check which type your account uses before you try to hedge.