How to Short the Euro

Short selling means that you sell an asset that you don’t own. In the stock market, a short sale requires the seller to have access to the shares they want to sell short and the ability to borrow those shares for their short sale. 

In the forex market, trading involves the exchange of two currencies, known as currency pairs, which means you’ll purchase one currency and simultaneously purchase another. 

Accordingly, if you want to short the European Union’s consolidated currency known as the euro (ISO 4217 code: EUR), you should have an idea of what other currency you want to sell the euro against. You should also ideally have a market view that is bearish on the euro and bullish on that other currency, which means you expect that the exchange rate between the euro and the other currency will likely fall.  

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What to Know Before You Short the Euro

Before you open an online forex account to short the euro, have a basic understanding of the currency markets. Many online forex brokers offer educational resources such as articles, videos and podcasts that specifically cover forex trading for beginners, so when choosing a broker, make this consideration a priority if you have limited experience in the forex market. 

A very important element to keep in mind is the underlying reason for taking that position. For example, a trader employing technical analysis could make a case for taking a short euro position by seeing certain patterns on the currency’s chart that shows the euro’s exchange rate plotted against another currency over time. 

Economic releases from both countries relevant to a currency pair can affect the exchange rate in either direction, depending on the actual number versus the market’s consensus expectation. So, remember to also consider the fundamentals and the European economic situation ahead of shorting the euro, even if the technical picture looks favorable. 

Another key thing to consider when shorting the euro involves the monetary policy of the European Central Bank (ECB) and the resulting cost to carry the position if you run it overnight. The ECB has held its main refinancing rate at 0.0% since 2016, and it has been under 1% since 2013, while its margin lending facility rate is at 0.25%. Also, its deposit facility rate is a negative -0.40%, which means it actually costs money to keep funds on deposit at the ECB. 

As long as interest rates in the EU remain at these low and even negative levels, the Eurozone’s currency will most likely be sold against higher-yielding currencies, such as the U.S. dollar and even the New Zealand dollar. Shorting the EUR/USD currency pair now will bring in a higher yield or positive carry against those currencies, as well as any possible capital appreciation the position might deliver if the euro heads further toward parity with the U.S. dollar. 

Another area to investigate ahead of shorting the euro is to determine what currencies would appreciate most versus the euro, as well as what currencies to avoid trading in the same direction due to their positive correlation with the euro, like the pound sterling and the Swiss franc. The euro is also generally the first or base currency in a currency pair, but you may need to take into account the inverted quotation convention for a currency pair when looking at the correlation between pairs. 

As an example of how the quotation convention can affect currency pair correlations, the exchange rate of the British pound versus the U.S. dollar (ISO 4217 code: USD) or GBP/USD was found to correlate +0.95% with the EUR/USD exchange rate. On the other hand, the USD/CHF exchange rate had a negative correlation of -1% versus the EUR/USD rate because the CHF and GBP are both closely correlated to the EUR.  This also means that the GBP/USD rate tends to move in tandem with EUR/USD 95% of the time, while the USD/CHF rate tends to move in the opposite direction 100% of the time.   

How to Short the Euro

Now, let's dive into the specifics of how to short a euro in forex.

Step 1: Pick a Broker

Depending on where in the world you’re located, you have a wide array of options for an online forex broker to short the euro. The best forex brokers will have oversight from a reputable regulator but the best broker for you would be the one that would best fit your needs. 

Keep in mind that when shorting the euro or any other currency, choosing the right broker is just as important as knowing how to go short.  Regardless of your trading style or need to hedge, the euro is the second most traded currency in the world and finding an online broker is easy even if you have no money since you can open a demo account free of charge. 

Here are a few of our favorites.

These days, most online forex brokers not only allow you to trade currency pairs, but you may also be able to trade stocks, options, commodities, CFDs and a host of other tradable assets. If your intention is just to short the euro, you could open an account with a broker that specializes in just currencies and possibly pay away a lower dealing spread on your trades. 

If you want to short the euro as a hedge against an underlying long position, then you might want to pick a broker that offers options trading on the euro, since this would offer you more creative risk profiles compared with just running a long position or hedging it with a short euro trade.  

Step 2: Open Demo Accounts

Next, open a free demo or virtual account with just about any of them at no cost or obligation to you.

These virtual accounts can be invaluable for testing a strategy or just to practice your trading through the broker’s platform. Ideally, you would open demo accounts with all the brokers you wish to evaluate to get an accurate idea of their services and to check out their trading platforms. 

Step 3: Develop an Investment Strategy

Trading without a plan of action is like driving blindfolded since you never know quite where you’re going or where you will end up. Most successful forex traders use some type of plan, whether they base their plan on technical indicators and signals or by watching levels of accumulation and distribution. They also typically keep a keen eye on the fundamental news related to the currencies involved that might quickly invalidate their technical analysis.  

Include specific position sizing and risk management elements in your trading plan. Keep in mind that the forex market can get extremely volatile and make sharp moves with absolutely no notice, so always close out trades or place protective stop loss orders if you can’t watch the market for some reason. 

Once you’ve worked out a winning trading strategy and applied it to a plan of action, watch the euro and how it trades against several currencies before placing an order to sell. While the euro may range trade for days sometimes, once it gets moving in one direction or the other, it could move quite a distance in a very short period, so always be on your toes when you have an open position in any currency pair. 

Also, understand the carry trade situation with the euro. For example, if you short the euro, you would basically buy another currency with an interest yield. For example, if you bought the U.S. dollar and shorted the euro, you might receive a positive carry of up to the 2.5% Fed funds rate, while you could pay close to 0.0% interest for being short the euro. 

On the other hand, if you shorted the euro against the Japanese yen, you would have a slightly negative carry since the yen currently has a negative interest rate of -0.10%, so you would have to pay that amount if you were long the yen and needed to borrow euros around 0.0%. So be aware of the interest rate differential of currency pairs you use to short the euro with if you plan on holding the position after 5 p.m. EST, which is when rollovers occur.   

Step 4: Start Shorting the Euro

Once you’ve developed a foolproof trading plan, you’re ready. Remember, trading in the forex market is not for everyone. You should ideally have a good sense of the risks involved in forex trading and have addressed them in your strategy which hopefully includes sound money management principles. With some luck, you’ve identified an optimum level to sell and can enter an order at that level. You can also watch the market and take action once your desired level to sell the euro is achieved. 

Once you’ve established your short euro position, you can enter trailing stops if your position has a profit to protect it. You will also definitely want to limit your risk, which you can do by watching the market closely or by putting in a stop-loss order at the level you intend to give up on the short position in case the euro rallies unexpectedly. Remember to cut your losses short and allow your profits to run. 

Forex Trading: Is it Right for You?

Trading in the forex market just isn’t for everyone. Operating successfully in this often volatile financial market requires patience, discipline and self-control, especially over your emotions. The great majority of new traders don’t last very long in the forex market, usually because they lack those very qualities and tend to lose money over time. 

The best way to know if you’ll be successful as a trader consists of using demo accounts until you feel comfortable operating in the market and have a winning plan. Once you’ve practiced enough and have addressed your own weaknesses when trading, then you’ll have the confidence and knowledge to become a profitable forex trader. 

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