Shorting the Pound: What Does Shorting the Pound Mean?

Shorting the Pound: What Does Shorting the Pound Mean?

Reading time: 7 Minutes

The pound, or GBP, is one of the main currencies in the foreign exchange market and the official currency of the United Kingdom (UK). The foreign exchange market, or ‘Forex market’, is the world's largest financial marketplace, a decentralised arena where traders speculate on price movement and hedge risk. 

Traders and investors engage with the Forex market by either entering long (a buy) or short (a sell) positions. This article focusses on the latter.

What Does Shorting the Pound Mean?

Forex trading involves exchanging one currency for another, structured through what is known as ‘currency pairs’. A currency pair is formed through a base currency (this is the first listed currency and always reflects 1 unit [and is the currency traded]) and a quote currency (the second listed currency in a currency pair and ultimately determines the value of the base currency). As an example, the British pound (GBP) in GBP/USD is the base currency, and the US dollar (USD) represents the quote currency and essentially informs market players how much 1 unit of GBP is valued in terms of USD. 

When a trader enters long, they essentially buy the base currency and simultaneously sell the quote currency, hopeful the base currency will appreciate against the quote. But, when a trader enters short, it is the opposite: selling the base currency and simultaneously buying the quote. For example, if a trader believes that the GBP will weaken against the USD, they would sell the GBP and buy the USD. Later, if the GBP falls in value, the trader can repurchase it at a lower cost and the return is the difference between the sell price and buy price.

However, when trading derivatives (contracts formed based on the underlying asset’s performance), the trader does not generally take ownership of the underlying asset. A derivative contract allows users to execute trades based on a contract to purchase or sell the underlying asset at a certain price on a specified date in the future. So, there is no transfer of ownership, only an agreement to do so in the future. Popular derivative contracts used to speculate and hedge Forex exposure are futures, options, swaps and, of course, CFDs (Contracts for Differences). Note that CFDs are always cash-settled instruments, whereas futures and options can involve physical settlement. 

How To Short Sell the Pound With FP Markets?

Currency pairs can be shorted through CFDs with FP Markets. 

FP Markets, a leading broker in online Forex and CFDs, provides access to more than 70 popular Forex pairs. These include all the major currency pairs, as well as minor and exotic currency pairs, and are available 24 hours a day, five days a week, catering to the continuous nature of the Forex market.

Steps to short-selling the pound with FP Markets: 

1. Create an Account With FP Markets and Choose Your Forex Account Type: 

FP Markets offers two main types of Forex accounts: the Standard Account and the Raw Account. Of course, you will also need to select your trading platform, which can be downloaded through your Client Portal. We have a wide selection of trading platforms available, from MetaTrader 4 (MT4) to cTrader.

If you are trading with a live Trading Account, the account will need to be funded through your Client Portal. FP Markets supports various funding methods, so choose one that is most convenient for you. Ensure you deposit enough capital to meet the margin requirements for your intended trades.

2. Research: 

Whether you’re shorting a currency pair or entering long, research is paramount. This is generally conducted through either technical or fundamental analysis or a blend of both analysis methods. Ultimately, how one trades and exercises the management of their positions will depend on the trading strategy employed. Therefore, having a back-tested trading strategy in place is imperative. 

3. Executing the Trade: 

Choose the specific GBP currency pair you want to short-sell based on research. This could be GBP/USD, or even popular cross-currency pairs, such as EUR/GBP (in the case of this currency pair, however, you must enter long EUR to short GBP).  

Assuming that you are trading with an MT4 account, selling the pound at the current market prices involves shorting at ‘market’. This will inform the broker to execute a short trade at the next available bid price (traders sell the bid price and buy at the ask price). With MT4, traders can simply press F9 to access the Order Window (as shown below) once the chosen trading instrument is selected, which, in this case, is the GBP/USD. Within the Order Window, you can then select whether to enter long or short at market prices or through a pending order (this is a limit order), as well as input the values for the protective stop-loss order and take-profit orders, together with the volume required to trade (lot size can be found through position sizing calculation). You will also see the current live bid and ask prices, both in written and graph form.