To make profits in the currency market, one common approach is to buy a currency that is expected to appreciate, wait for its value to rise, and then sell it. However, there is an alternative method that can also lead to earnings. By taking the opposite approach and selling an asset when its price is expected to drop, traders can make profits through short positions.
While short trading can lead to significant profits, it also comes with higher risks. Traders Union experts delved deeper into how to open a short position on the Yen and succeed in this type of trading.
What is a short position?
Thousands of successful traders use short positions on Forex. TU analysts illustrated how shorts work using a stock example. Assuming a trader predicts IBM stock will crash, they borrow 100 shares from their broker and immediately sell them at USD 150 per share. When the stock drops to USD 120 in the evening, they buy 100 shares and return them to the broker.
Forex short positions: how do they work?
Experts at Traders Union point out that in Forex, “short” refers to selling a currency with the expectation of it losing value. Traders open short positions to sell a currency pair, anticipating a decline in its value. Typically, traders borrow the asset from a broker for short selling.
For example, in the USD/JPY currency pair, if a trader believes USD will decrease in value against the Yen, they may borrow and sell $1500 (1500 x 136.19) in the market. If the exchange rate later becomes USD/JPY = 130.05, and they buy back the $1500, the profit from shorting the Yen can be calculated by comparing the price difference.
A guide to shorting the yen
Learn how to short the Japanese Yen (JPY) on Forex and potentially profit from price declines.
- Sign up with a regulated Forex broker offering JPY and various currency pairs.
- Sign up for a spread betting or CFD trading account.
- Analyze the JPY pair using technical and fundamental analysis, and decide on risk management and a trading strategy.
- Open a short position on the JPY, optionally setting stop-loss and profit target orders.
- Implement risk management strategies, including stop losses, monitoring news, and setting price alerts for trades.
Is it a good idea to short Yen?
TU analysts stress that the Japanese Yen can decline due to various factors, creating short-term trading opportunities. Drivers weakening the JPY price include financial market sentiment, economic downturns, geopolitical factors, fundamental macro trends, and the Central Bank of Japan’s monetary policy. Shorting the Yen is possible when these factors are present, like during economic recessions, stock market crashes, global pandemics, or political conflicts. Profit by recognizing specific signals indicating a potential Yen decline.
Shorting Yen with ETFs
Currency ETFs offer quick and cost-effective access to foreign exchange markets, providing international investors exposure to the Japanese yen. These ETFs enable diversification, profit from arbitrage, and protection against economic events. Here are four top ETF options for shorting the yen:
- Invesco CurrencyShares Japanese Yen Trust (FXY) – Tracks the yen’s price relative to the USD with a 0.4% expense ratio.
- ProShares UltraShort Yen ETF (YCS) – Provides inverse currency opportunities for euros and yen, seeking twice (-2x) the yen’s daily performance against the USD.
- ProShares Ultra Yen ETF (YCL) – Offers 2x long exposure to yen trading against the USD using derivatives, aiming to follow daily changes in the yen’s spot price relative to the USD.
- WisdomTree Japan Hedged Equity Fund (DXJ) – Invests in Japanese stocks while hedging against fluctuations in USD and yen values, suitable for investors anticipating a yen decline and interested in Japanese stocks.
Short positions offer an alternative method for traders to profit in the currency market by selling an asset with the expectation of its price dropping. By considering the above information and using the recommendations from Traders Union analysts, traders can potentially capitalize on price shifts and earn profits in the currency market.