Categories
Forex Stop-loss & argets

When Should I Sell a Short Position in Forex Trading?

Interestingly, this question assumes one knows when to go long and when to stay put. The notion that some assets cannot go down to zero spurs the idea going long is safer while shorting has a cap – when the assets become worthless or at zero. This might be true to one type of trading, with penny stocks and with altcoins in the cryptomarket. The strategy is about holding cheap assets that are about to get noticed sometime in the future. Depending on how you diversify your strategy, this day may never come. Shorting what is already cheap does not make sense, right?

It depends on how you make that assessment and on what timeframe. Expecting gold, for example, to rise in the next hour makes it cheap to buy currently, it is irrelevant if it went to record highs in the current year. Stocks especially are regarded as the assets where investors buy and hold for a longer period, for a few years for example, on the other side, shorting on such a long period is very rare. Certainly, there is a difference, but in forex, we do not have such assets or currencies that can justify preference to go only long. We are not going to discuss how to get a signal to go short here, it is something traders have to develop along with their strategies and systems, it is a very broad and lengthy subject.  

Let’s take a look at the USD. The chart below depicts the USD basket movement (against the other 7 major currencies) for the last 10 years. 

To some investors holding the Dollar proved to be a good investment if we compare it to other major currencies. However, a stock index such as the S&P 500 shows a much better proposition:

Indexes are derived and calculated based on the stock’s aggregated value, in USD. Concerning other currencies, the USD didn’t lose any value but compared to the performance of the stocks, it is evidently short. Therefore forex provides just as good opportunities to short as to long a certain currency. We should keep in mind we can short one currency by holding other assets whose value is expressed in that currency, in our case the USD. 

If we strictly limit our trading to fiat currencies, we are actually looking at the money flow, which can always go in different directions and therefore provide short and long trading opportunities. Currencies went away from the Gold standard and now have complete freedom how they can change value. Most traders think there is no supply or demand in forex, no forces that can push a currency because it is scarce, in-demand, or surplus. Actually, when governments have printed so much of a currency it tends to be devalued, but not because of the surplus effect per se, but from the perception of its value. 

Traders should be familiar with the crashes, economic cycles, political events, wars, and now even pandemics that drive the bear market. They set up extreme moves and knowing how and when to short positions is probably the quickest way to get wealthy, much faster than longing for an asset for many years. One bear rush can easily cut gains made for a decade in one week sweep. Risk-off currencies such as JPY, CHF, and USD will spike so we also have the other side of the coin. Crashes come and go fast, development is long and slow. 

Now, we are going to try to pin down several actions that could lead us to make the most out of the bear markets, be it forex or equities, it does not matter as explained above. Financial advisors are mainly long, just because that is what they know about, it is very rare to hear your financial advisor to go short. Once an economic downturn comes you will be stripped. Take a look at the S&P 500 chart once more, how come the US economy went up 50% since the Trump takeover, and even “after” the pandemic it is at a new record high? Take a look at the global interest rates – around zero levels. Governments print money, so we have all the ingredients to go short here, long term.

However, take a step back, the printing of fiat can keep up, the indexes can even go higher. The turning point is when the psychological value of money disappears. This has not happened yet, and it may even come in 2030. Traders need to get out at the buy and hold safe heaven assets strategies here before the crisis comes. Be proactive and trade only swing trades if you have a setup for other, risk-on assets such as indexes or risk-on currencies. A lot of fundamental data conflicts with the real situation, when it unravels the markets may even be close for trading, leaving you trapped with losing positions. Also, use inverse ETFs if you need to short an asset that you cannot the normal way. 

Try to find contrarian traders online through social media. Twitter and YouTube is a good start. Make sure they have logic, data, and sense to back up their points. Follow their networks and diversify on angles on the same topics. Then take your own point on the economic status with your own research on this and make decisions. Some examples of notable people prop traders mention are Chris Martenson, Peter Schiff, and Ray Dalio. Some of them make predictions, some are reserved, but digest on how they interpret the economic data to understand what is going on in the markets. These mechanisms, knowledge, will be your guide when to short the right assets. 

When it comes to “when”, trust your strategies and systems. Trying to trade others’ predictions is not a good idea. Most of the predictions fail, or they are not well defined to be of any use to a trader. Never try to follow opinions like the famous “buy the dip”, “buy while it is cheap” and so on. These opinions are not aligned to you and are probably reversal traders that trade before the trend. It is very arbitrary what is cheap when it is still in a downtrend. The big shorting before the crisis is quietly announced, you may even lose once or twice (have you shorted the two fake drops in S&P 500 since 2018?) however, the huge drop in 2020 lasted only for 30 days, negating everything made for the last 4 years and could as well be much more than make up for the two losers.

Interestingly, the markets recovered in 2020 and are making all-time highs at the moment of this article. The epilogue might be an even bigger drop you will be ready for in 2021, you know all the story behind it, and your systems will show the signal when it is time to short. 

Now, if you really believe in the fundamental analysis, you want to hold safe-heaven assets long term, in this case, you do not have to wait for the technical. Just go with your prediction and stick to it even if that asset is down for the year. You are looking at the long-term hold here, and some assets, such as silver, for example, have extremely bullish data, as described in our previous articles. Whatever happens, be sure to diversify your bearish and bullish positions across various assets. In a bear market, there are two sides to the coin, the bullish reversal is around the corner, then another bear pull. It went wild during this pandemic in 2020, you might as well use the opportunities in 2021 and grab years worth of profits in a short time. All markets are in, not just forex, pay attention to indexes, crypto, hard assets, and others under the CFDs.