Playing against the GBP: the best options
There are two ways to earn on currency pairs in the stock and Forex markets. If you believe that the base currency’s price will rise, you open a long position, i.e., buy the base currency to sell it later at a higher value. If you think the base currency will depreciate, you can borrow it and sell it at a current price and then buy it back and repay your debt when the price declines. This review considers the mechanism of shorting the GBP/USD pair.
How to Short the GBP on Forex:
Create a Forex account with reputable brokers with low minimum deposits, or log in to your existing account
Learn about the brokers' currency shorting options and the list of currencies you can short
Carry out proper research on the currency you want to trade, for example, GBP/USD
Analyze the nation's economy before performing an analysis on that Forex pair
Identify a Forex trading strategy and design a risk management strategy
On the broker's shorting currency page, open your first position by selecting "sell" if GBP is the base currency or "buy" if it is the quote
What is a short position?
Dozens of thousands of successful traders use short positions on Forex. However, it is easier to explain how the shorts work using the example of securities or stocks. Let’s assume that a trader performed market analysis and is convinced that IBM stock will crash by the evening. He can profit from this by taking the following steps. A trader borrows 100 IBM shares from his broker and sells them immediately at their stated price, let’s say USD 150 per share. In the evening, the stock price drops to USD 120, the trader buys 100 shares and returns the debt to the broker.
How much will he earn by opening a short position at the exchange? 100х150= USD 15,000 – this is the amount he sold the shares for. 100х120= USD 12,000 – and this is the amount he later bought the shares for in order to return them. USD 15,000-USD 12,000=USD 3,000 – that’s how much he earned (minus the trading fee). It is a very simple mechanism. You use the same principle to open short positions on US dollar or other currency in order to first sell the borrowed funds and then buy them, when the price drops, and return to the broker.
How to Short Currency in the Forex MarketHow to short the GBP – a step-by-step guide
There must have been a carefully conducted analysis of the pound's falling price when traders decided to short the GBP. Since shorting an asset entails wagering against its value, your goal is to borrow to sell high and buy low to make a profit.
Before you learn how to short the GBP, remember that you can short the pound against currencies like the USD, euro (EUR), or any other currency. Here is a guide on how to short the GBP:
The first step is to choose a reputable company that offers GBP and other currencies. Consider brokers who require small minimum deposits
To open an account, register with the broker. After registering, you can open a spread betting or CFD trading account and access the supported trading platform
Enter GBP Index (or GBP to see all GBP-related products) in the search box, then click to display its trading chart
Do some research on the currency pair you want to trade, such as GBP/USD. After assessing the market conditions, decide on a Forex trading strategy, create a risk management strategy, and conduct technical and fundamental analysis on that currency pair
Activate a short position on the GBP. After entering your trade size, click the sell button to place a trade at the current price
Next, if you'd like, you can modify the order to include a stop-loss and profit target. When you buy the pounds and transfer the funds back to the broker, the position closes, and all fees are paid
You can figure out your profit because it depends on the difference in exchange rates between the two transactions
How to short GBP (GBP) With ETFs -Best Options
Investors can look for ETFs that track the performance of the British pound or the UK economy when learning how to short the GBP. Here are the best ETF options for shorting the pound.
1. WisdomTree Short GBP Long USD(SGBP)
The WisdomTree Short GBP Long USD (SGBP) provides investors with "leveraged short' exposure to Pounds Sterling ("GBP"). And it does this by tracking the MSFX Short British Pound Index (TR) (the "Index") while simultaneously shorting the British pound sterling.
SGBP provides returns inverse to the performance of the GBP/USD currency pair. And with an ETC legal structure and a passively managed strategy, the trades must be on an exchange, just like shares in a company. The ETC obtains exposure to the index by entering into unfunded swaps with a counterparty.
It tracks the pound's price against a basket of other currencies as an ETF with a bearish outlook on the pound. As of 5/10/2023, the total AuM was $1.36 million, with an annual total expense ratio of 0.39% and a tracking difference that was 1
year old.
2. Invesco CurrencyShares British Pound Sterling Trust(FXB)
Investors can short the GBP using the Invesco CurrencyShares® British Pound Sterling Trust (FXB). The ETF offers investors shorting investment options with the British pound sterling without having to buy and sell actual money.
To assist investors in understanding the risk and return characteristics of the fund, FXB discloses its holdings daily. Additionally, it is a helpful tool for those looking to speculate on currency movements or act as a hedge against currency fluctuations.
This ETF is ideal for investors who want to increase the currency exposure in their portfolio or mitigate currency risk. Assets under management total more than $103.07 million, with an expense ratio of 0.40% and a grantor trust legal structure. The fund's low expense ratio aids in lowering the overall cost of investing.
3. WisdomTree Long EUR Short GBP (GBUR) ETF
WisdomTree Long EUR Short GBP (GBUR) is another top ETF that discloses Euro ('EUR') relative to Pounds Sterling ('GBP') price movement to investors. And this is done by keeping an eye on the MSFX Long Euro/GBP Index (TR) (the "Index"). This gauges how well a position in daily-rolled forward contracts is performing.
Even though GBUR is an ETC (exchange-traded currency), securities are traded on exchanges. The London Stock Exchange is the trading venue for the WisdomTree Long EUR Short GBP (GBUR) ETF. The size is £1.3 million, with an expense ratio of 0.39%.
The ETF can be used to manage currency risk or make speculative bets on currency movements and provides the convenience of trading on an exchange, much like trading stocks.
Best ETFs to buy and holdWhen should I short GBP?
Investors short the pound to profit at certain times. But shorting GBP goes with understanding the right conditions and timing. It is unprofessional to short the pound without analyzing the market. So below is the best time to short the pound:
Whenever the Federal Reserve lowers interest rates and there is little or no inflation. In addition to poor economic data, the British pound declines if interest rates are cut while other countries have not
When interest rates are skyrocketing, public debt is increasing, the economy is growing slowly, and trade deficits are widening
Short the pound if the GBP recently hit an all-time high and a breakdown is anticipated
Times of rising, inflation, employment, and consumer spending accompanied by economic instability
When there is political instability, changes in government policies, and uncertainty surrounding geopolitical events
How does a short position work on Forex?
A short position is open when a trader decides to sell a currency to buy it later when the price drops even further. A trader can start by opening a short position section after signing up with a broker, then enter the details on the order screen. Notably, this also calls for a margin account and any required permissions.
Remember that you're selling an asset to open a position and then buying it to close the trade. Here is how a short position works on Forex:
In exchange for the investor returning the currency, the broker lends the currency out
The investor sells the currency by opening a short position
After some time, the investor purchases the currency and returns it to the broker to enable the closure of the position
An investor could profit or lose money depending on how much the security's price has dropped or increased since the sale. However, if traders fail to return the funds before the cutoff, brokers will issue margin calls to them
What is a margin?
The collateral investors must deposit with their broker is known in finance as the margin. And it covers the credit risk the holder poses for the broker or the exchange. An investor receives a margin call when the value of their account falls below the minimum value required by their broker.
Remember that no broker will give you a free loan in any currency. Therefore, you should exercise caution when setting the initial and minimum margins. The initial margin (asset price multiplied by the risk ratio) is the security required to open a position. The minimum margin, which is equal to 0.5 of the initial margin, is then the sum of the funds on the account required to support opening a position. With this, a broker protects itself up until the time when you return the loan.
CFD brokers also have the concept of margin, free margin and level:
Used margin is the funds from your deposit that are blocked when you open a trade. Used margin = (Trade size (in lots) × Contract size (in currency units) × Quotation) / Leverage.
Free margin is free money. Free margin = Equity – Used margin.
Margin level is calculated as a percentage. Margin level = (Equity / Used margin) × 100%.
If the margin level drops lower than the value set by the broker, trades are automatically closed at the expense of the trader’s collateral.
What you should know before opening a short position
The broker will either decline to lend you money or close your open position due to low portfolio liquidity. So, consider the cost of the liquid portfolio, which is determined by the following equation: the value of the assets on the client's account minus the broker debt.
Once more, there is a relationship between leverage and risk ratio; the risk ratio (probability of asset price change) determines the leverage. However, this affects how much traders can borrow in GBP from the broker. When leverage increases, the risk ratio decreases in direct proportion to asset volatility.
Example of shorting GBP
You can short the pound or open a short position on Forex using ECN, and STP accounts, as well as trade CFDs and futures spread bets.
In contrast, to spread betting, which involves making a speculative wager on an underlying instrument's price movements without actually owning it, contracts for difference, or CFDs, are short-term leveraged derivative contracts.
But here are some simple examples showing how to short the GBP. These examples will show you how to short the GBP without including some forex nuances and factors. However, this is to help you understand how the short-position mechanism works in real life.
Example:
The current rate of GBP/USD is 1.32. It means that 1 GBP costs 1.32 USD. The trader believes that the British pound’s value will decrease to 1.30 USD. Therefore, he borrows 1,000 GBP and sells it for 1320 USD.
When the pound’s price goes down, the trader buys 1,000 GBP for 1,300 USD, repays the debt, and gains a profit of 20 USD.
Use stops and limits to reduce risks when shorting the pound. Consider the recent volatility of the currency pair before deciding on a stop-loss or limit level
Risks and opportunities of a short position on Forex
Everything is rather clear with the opportunities short selling on Forex offers – a trader can profit from a decline of an asset price (currency, stock, commodity – short positions can be open on anything) in a short time. In fact, it is possible to earn rather a lot, if your prediction of a strong collapse of the price turns out to be right and if you smartly diversify the risks. Experienced traders make USD 2,000-4,000 a week on shorts and that’s not the limit.
There is a nuance: trading conditions may include payment for the so-called margin trading, i.e., payment for borrowed funds. For example, CFD brokers don’t charge such fees, but they do charge daily swaps (fees on keeping positions open overnight) that also apply to short positions. Stockbrokers can charge APRs on loans granted for short positions. For example, for every $1,000 borrowed at an APR of 13 %, you will pay $130 per year or $0.36 per day. If a short position is opened and closed on the same trading day, charges don’t apply.
The other important nuance of a short position at the exchange and on Forex is the increased risk due to the mathematical expectation. To put it simply, when you buy an asset, its price can grow indefinitely, so your profit has no limit in the future. Meanwhile, the price of an asset can only drop to zero, which means your loss is limited to a strictly invested amount. That is, by buying securities or another asset for USD 1,000, you have the opportunity to earn $5,000 or more, but you can lose only USD 1,000.
In the case of a short, everything is the other way around – your profit is always strictly limited, but your loss isn’t. Taking into account that you are trading borrowed funds, the broker will not let you lose too much (that’s what the margin with the risk ratio is for); in case of a bad trend, he will take part of even all funds that were locked on your account as the loan collateral.
Squeeze is the biggest risk of a short position. It is a situation, when a trader becomes a hostage of his own actions. For example, he actively buys currency futures, thus creating the demand and causing the asset price to grow. Bears, who bet on the price to fall, are not happy about it. So they open short positions selling the asset with the intention to buy it later, when the price drops. If the effort of the bears is not enough and the trend does not change, they are forced to close the positions at the market price to avoid losing more money. This however only makes the trend stronger.
A short squeeze is a situation where the asset price rises rapidly due to forced closure of short positions. The price goes up under the pressure from buyers, and sellers have to close short positions manually or through stop-loss orders. Short positions are closed as the asset is bought, and the additional demand pushes the price up even faster. The short squeeze is a problem for sellers because it happens suddenly, quickly, and with slippage. This risk should be taken into account in trading strategies.
How to Use Risk Forex Risk Management EffectivelyAccount types for shorting currencies
Currency trading options
There are two ways to trade currency and currency instruments: trading with a stockbroker or a CFD broker.
Stockbrokers provide traders with access to international currency markets where real assets are traded. One of the derivative instruments traded in currency markets is currency futures.
Futures are also a contract. Under this contract, the seller undertakes to supply the asset to the buyer at a state price after a stated period, and the buyer undertakes to buy this asset. The key benefits include a “built-in” leverage (because it is not necessary to pay for the contract in full), low fees and it is possible to hedge positions.
The cons are predictable. First of all, it is impossible to “wait out” the bad trend. For example, if the price of an asset suddenly started to climb, it is not beneficial for the trader to wait until it starts decreasing. First, he pays a fee for each day of waiting. Second, there is a variation margin, because of which he will either have to replenish the account or close the position.
CFD brokers offer CFD trading.
CFDs (contracts for difference) are concluded for a certain period, and the trader gets the difference of the asset price at the time of opening and closing of the trade. CFDs have a rather low collateral, there is no need to wait for the validation of the opened orders and stop orders are closed under any conditions. Other advantages include high leverage and low deposit requirements.
However, a short on Forex using CFDs has a number of drawbacks. For example, it is not an investment instrument. A trader does not own the asset, and all transactions are strictly speculative. Furthermore, CFDs carry a high level of risk that is difficult to diversify, especially when trading with high leverage.
Account types for shorting currencies in CFD trading
CFD brokers offer two primary account types:
STP account. In this model, the broker routes the trader’s positions directly to those liquidity providers with which the broker has partnership agreements. These are mostly institutional banks. The spread on such accounts is wider, as it includes margin and fees charged by all transaction participants. Trades are executed slowly, but, in periods of high volatility, the spread widening is relatively small.
ECN account. In this model, trades are routed to global ECN platforms to be executed between market participants at the best current prices. Examples of such platforms: Currenex, Integral, etc. Here, trades are executed instantly and spreads are from 0 pips. But spreads may widen, and brokers charge fixed fees on each lot.
GBP/USD price prediction
GBP/USD is considered a major pair, but with certain nuances. The UK is considered the EU, but it has its own currency supported by one of the world’s strongest economies. Brexit, which is not fully complete at the moment, has been the key factor that impacted the price. Thanks to the tough, conservative policy of the Bank of England, the GBP/USD pair has a rather small volatility and high liquidity. GBP/USD is the third most popular pair, with its trading volume accounting for around 12% of the total trading volume.
GBP to USD (Pound to Dollar) ForecastBest Forex brokers for short selling
Experienced traders recommend shorting with CFDs and on ECN accounts, but not all brokers offer good conditions for these instruments. Below, we will briefly describe the platforms that have been recognized as leaders in their segments.
RoboForex – Best ECN Broker
The broker offers ECN accounts on exclusive conditions – $10 minimum deposit, spread from 0 pips, leverage up to 1:500/1:2000. Thanks to high liquidity and lightning-fast order execution, you can implement any short-term strategy. ECN accounts are available for currencies (36 pairs), precious metals, and cryptocurrencies. Trading is available on MT4, MT5 and cTrader platforms. The fixed fee on 1 full standard EUR/USD lot on an ECN account is $2.
IC Markets – Best CFD Broker
The broker offers CFDs on all types of assets; there is also a demo account for testing strategies. The spread from 0 pips, trading is available 5 days a week on MT4, MT5 and cTrader platforms. The leverage is up to 1:500 on MT platforms, up to 1:30 on cTrader. IC Markets is one of few brokers offering CFDs on Bitcoin and dozens of popular altcoins. Thanks to spread from zero, it is more beneficial to trade CFDs rather than currency directly. The broker’s pool features over 2,000 and it is licensed by ASIC and CySEC.
FAQs
How do you short the UK pound?
To short the pound, sign up with a broker and analyze the price about some economic factors, like inflation. Use the short position options on your Forex broker's services to short the pound if your analysis and research indicate that it will lose value quickly.
Can I short in the UK?
Yes, you can short in the UK. But ensure to analyze and create a strategy to guide you when you short the pound. Also, include some risk management options to reduce the risks when you open a short position.
What makes the pound weak?
The British pound is weakening in relation to USD and EUR due to the growth of inflation and unemployment, as well as the worsening of GDP forecasts and other macroeconomic statistics in the UK.
What is an example of shorting currency?
A strong conviction that a currency, such as GBP, will decline over the next few days is the tool you need to short a currency. Then, you short when you decide to borrow the currency from a broker, sell at the current price, and buy it when the price drops.
Glossary for novice traders
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1
Broker
A broker is a legal entity or individual that performs as an intermediary when making trades in the financial markets. Private investors cannot trade without a broker, since only brokers can execute trades on the exchanges.
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Trading
Trading involves the act of buying and selling financial assets like stocks, currencies, or commodities with the intention of profiting from market price fluctuations. Traders employ various strategies, analysis techniques, and risk management practices to make informed decisions and optimize their chances of success in the financial markets.
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CFD
CFD is a contract between an investor/trader and seller that demonstrates that the trader will need to pay the price difference between the current value of the asset and its value at the time of contract to the seller.
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Investor
An investor is an individual, who invests money in an asset with the expectation that its value would appreciate in the future. The asset can be anything, including a bond, debenture, mutual fund, equity, gold, silver, exchange-traded funds (ETFs), and real-estate property.
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Leverage
Forex leverage is a tool enabling traders to control larger positions with a relatively small amount of capital, amplifying potential profits and losses based on the chosen leverage ratio.
Team that worked on the article
Peter Emmanuel Chijioke is a professional personal finance, Forex, crypto, blockchain, NFT, and Web3 writer and a contributor to the Traders Union website. As a computer science graduate with a robust background in programming, machine learning, and blockchain technology, he possesses a comprehensive understanding of software, technologies, cryptocurrency, and Forex trading.
Having skills in blockchain technology and over 7 years of experience in crafting technical articles on trading, software, and personal finance, he brings a unique blend of theoretical knowledge and practical expertise to the table. His skill set encompasses a diverse range of personal finance technologies and industries, making him a valuable asset to any team or project focused on innovative solutions, personal finance, and investing technologies.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).