PLAY BOTH SIDES: LONG OR SHORT

PLAY BOTH SIDES: LONG OR SHORT
If one wants to take advantage of a price decline, one of the advantages that
the forex market has over equity markets is that there is no uptick rule as
exists in the stock market; short selling in forex is similar to that in the futures
market. By definition, when a trader goes short, he is selling a currency
with the expectation that the price will drop, allowing for a profitable
offset. If the market moves against the trader’s position, he will be forced to
buy back the contract at a higher price, resulting in a loss on the trade.
There is no limit to how high a currency can go, giving short sellers an unlimited
loss scenario. Theoretically, a short seller is exposed to more risk
than a trader with a long position; however, through use of stop orders,
traders can mitigate their risk, regardless if long or short. It is imperative
that traders are well disciplined and that they execute previously planned
trades, as opposed to spontaneous, spur-of-the-moment, emotionally driven
trades. There are obvious benefits to short selling. This aspect of the forex
market allows traders to profit from declining markets. The ease of selling
contracts before buying them first is in contrast to typical stock trades.
Market prices have a tendency to drop faster than they rise, giving short
sellers an opportunity to capitalize on this phenomenon. Similarly, prices
will often rally gradually with increasing volume.
As prices begin to reach a peak, trading volume will typically taper
off—a signal to short sellers to initiate a trade. When a reversal does occur,
there will typically be more momentum than for the corresponding up
move. Volume will increase throughout the sell-off until the prices reach a
point at which sellers begin to back off. The concept here is represented in
detail in this book and is a powerful tool for swing and position traders.
Even day traders will benefit from knowing volume analysis. It is important
to know where to get the daily volume information and how to apply this information
to foreign currency trading. I will share this with you shortly.