Best options to play against the dollar
Everybody has a good understanding of how to take advantage of the rising prices. A trader buys currency, when he believes that it will grow, and sells it as soon as that growth reaches its potential high. These trades are called long or long positions. However, as paradoxical as it may sound, you can also earn money when the price of the asset is dropping. Such trades are called shorts or short positions. You can open a short position at the exchange for any asset, a currency or a stock. This type of trading can bring colossal profits, but the risks are also high. Let’s take a closer look at how to open a short position on the US dollar and win.
How to short the US Dollar:
Step 1. Select a Forex broker
Step 2. Open an account
Step 3. Choose a currency to trade against the Dollar
Step 4. Analyze the market situation
Step 5. Open a short position
Best options to play against the dollar | Course for Beginners Traders by TU
Below you will find all the information.
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 does a short position work on Forex?
There are a number of nuances about the shorts on the US dollar, other currency or security. Brokers do not lend your funds for free. For example, when you borrow US dollars from a broker, you pay a fee every day while your position is open. This is called margin lending. The expenses are leveled rather simply – usually brokers don’t charge the fee for the first day of the loan, which means that if you close the position quickly and will not roll it over to the following day, you will be able to avoid additional expenses.
Shorts on Forex also have security. It is an amount on your account that will be blocked as a collateral until the position is closed. This means that the broker protects itself up until the time when you return the loan. The most important indicators for a trader are the initial and minimum margin. The initial margin is the security required for opening a position. It is calculated by the following formula: price of the asset x risk ratio. The minimum margin is the amount of funds on the account required for supporting opening of the position; this margin is 0.5 of the initial margin.
When opening a short position at the exchange, you need to take into account the cost of the liquid portfolio, which is calculated by the following formula: value of assets on the client’s account minus the debt to the broker. If the portfolio liquidity is low, the broker will not lend you funds or will force-close the position, if it has already been opened.
Finally, there is leverage and risk ratio. Leverage determines the loan potential. For example, if leverage is 1:5, a trader with USD 100 can borrow from the broker another currency or shares for the amount of USD 500. The leverage is determined by the risk ratio (it is also taken into account for the calculation of the initial margin). Risk ratio is the probability of the change of the asset price. The indicator is regularly updated by the broker based on the market situation. The lower the asset volatility, the lower the risk ratio and the higher the leverage.
Example of shorting the US dollar
It is more beneficial to open a short position on the US dollar on ECN and STP accounts. We will discuss them in more detail below, but the one thing to know about them is that the order execution on them is super-fast. This is extremely important when you are shorting the US dollar or any other currency.
Let’s assume that a trader is analyzing the market and sees that the US dollar price against euro is about to drop. He borrows USD 1,000 from the broker with leverage 1:3, using euro on his account as a collateral. He immediately sells the dollars at USD 1 for EUR 0.93353. Two hours later, the US dollar price plunges suddenly to EUR 0.85334 and the trader buys USD 3,000 in order to return them to the broker (he borrowed USD 1,000 with leverage 1:3).
Therefore, by selling the borrowed dollars right away, the trader got EUR 2800.59. Then, he bought USD 3,000 spending EUR 2,560.02. The dollars are returned to the broker and the trader’s profit is EUR 2,800.59 – EUR 2,560.02 = EUR 240.57.
Example of shorting the British pound
All shorts on Forex are opened the same way for the chosen instrument; the currency does not change the mechanism. The algorithm is only determined by the instrument (for example, ECN, CFD or currency futures). For example, in the case with CFD, a trader does not buy or sell currency, but concludes a contract for differences of the prices at the time of position opening and closing.
Let’s take a closer look by using the example of the British pound our potential investor plans to short. He borrows GBP 10,000 from the broker and concludes a CFD for this amount. The current price of the British pound against the US dollar is 0.79936, but the trader believes that it will drop by the end of the week. That’s what the CFD is concluded for. The price does drop to GBP 0.81112 / USD 1. The difference for the GBP 10,000 contract is as follows: GBP 8,111.2 - GBP 7,993.6 = GBP 117.6, and that is the profit of the trader, minus the fee. This is a rather rough example of a Forex short that does not take into account a lot of nuances and factors, but it does clearly show how the short position mechanism works. Below we will take a closer look at the account types, where it is most profitable to open a short on the US dollar or other currency.
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.
What’s the catch? We already mentioned the first nuance – brokers do not give out loans for free. The interest rate of a short can be checked in the chosen tariff plan. For example, the rate is 13% annual. This means that for each USD 1,000, you will have to pay USD 130 per year or 0.36 cents per day. If the position remains open for several days, the amount may be considerable.
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, when the number of sell bids drops and the asset price rapidly grows. This happens, when bears are actively closing their positions, wanting to avoid losses due to an unfavorable trend. No matter how well a trader calculates the economic situation in the world, he won’t be able to protect himself from a squeeze. This risk cannot be avoided.
Account types for shorting currencies
It is best to open a short position on the US dollar and any other currency on the ECN and STP accounts, as well as trade CFDs and futures. Let’s review the pros and cons of each option.
ECN/STP
When using the STP model, a broker concludes a contract with specific liquidity providers (usually 5-10 banks). With ECN, all trades of traders are brought to a single market with multiple liquidity providers. In both cases, the orders are executed very quickly and at the best price of the pool of liquidity providers.
The execution speed is a plus. Also, ECN accounts have floating spread; it can be close to zero, if there is a buyer and a seller with the same price. The quotes are always market; there are no limitations on the strategies and a big deposit is not required. However, with ECN, the market dictates the price, which is why the spread can widen considerably. In case of STP, the spread is limited by the agreement with the liquidity providers.
CFD
We have already mentioned the contracts for differences. Such a contract is 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.
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; there are no limitations for shorts on Forex 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.
How to short the US dollar – a step-by-step guide
Step 1. Select a broker that offers the instrument you are interested in on the best conditions (small minimum deposit, low fees).
Step 2. Register, open an account (it is better to do it through TU in order to receive rebates – compensation for the trading fees for each trade).
Step 3. Select an asset and analyze the market situation. Employ the methods of technical and fundamental analysis, make a prediction.
Step 4. Open a short position on the US dollar, which means that you borrow dollars from the broker and sell them right away. As soon as the price starts to go down and reaches (in your opinion) the bottom, buy the dollars (the same amount that you borrowed).
Step 5. When the position closes (once you buy the dollars), the funds will be automatically returned to the broker. All fees are paid in the process. Now you can calculate your profit.
How to Short Dollar With ETFs - 4 Best Options
Shorting the dollar has become an increasingly popular move when trading ETFs. For those unfamiliar with the process, shorting the dollar means betting against its strength and expecting it to depreciate over time. Shorting allows traders to benefit from a decrease in value, as opposed to traditional investing, which only allows you to benefit when an asset increases in value. But what are the best options for shorting the U.S. dollar with ETFs? Let's take a look at four of them.
WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU)
The WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) is an exchange-traded fund (ETF) that seeks to provide a bullish outlook on the U.S. dollar. The ETF is designed to track the price of the U.S. dollar against a basket of foreign currencies, including the euro, yen, pound, Canadian dollar, Swiss franc, and Swedish krona. The Fund may also invest in U.S. Treasury securities and cash equivalents.
The trading idea behind the USDU ETF is that investors who are bullish on the U.S. dollar can use the Fund to gain exposure to the currency. This exposure can be used to hedge against currency risk or to take advantage of a strong dollar in international markets. The ETF uses futures contracts to achieve its objective, which means it has some degree of leverage.
The expense ratio of the USDU ETF is 0.50%, which is slightly higher than the average expense ratio for ETFs. However, the Fund's management fees are included in this expense ratio, so there are no additional fees beyond this amount. As of February 2023, the Fund controls $312.08 million in assets.
Best Online ETF BrokersInvesco DB U.S. Dollar Index Bearish Fund (ticker: UDN)
The Invesco DB U.S. Dollar Index Bearish Fund is an exchange-traded fund (ETF) that seeks to provide inverse exposure to the U.S. dollar by tracking the Deutsche Bank Short U.S. Dollar Index (USDX) Futures Index. The USDX futures index measures the value of the U.S. dollar relative to a basket of six major currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.
The trading idea behind the Invesco DB U.S. Dollar Index Bearish Fund is to provide investors with an opportunity to profit from a potential decline in the U.S. dollar relative to the basket of currencies represented in the USDX futures index. For example, suppose an investor believes that the U.S. dollar is likely to weaken against the basket of currencies represented in the USDX futures index. In that case, they could buy shares of the ETF to benefit from any potential gains.
The Invesco DB U.S. Dollar Index Bearish Fund uses leverage to achieve its investment objective. The ETF seeks to provide inverse exposure to the USDX futures index by investing in short-term futures contracts that track the index. The Fund also uses financial instruments such as swaps to achieve its investment objective. Using leverage and financial instruments can increase the risk and potential volatility of the Fund's returns.
The Invesco DB U.S. Dollar Index Bearish Fund has an expense ratio of 0.78%, which is deducted from the Fund's assets and covers the costs of managing the Fund, such as research and trading expenses. The Fund controls $108.97 million in assets.
The Invesco CurrencyShares Euro Currency Trust
The Invesco CurrencyShares Euro Currency Trust is an ETF that seeks to provide exposure to the euro currency by holding physical euro currency in a bank account. The Fund's objective is to reflect the price of the euro in U.S. dollars. Investors can use this ETF to gain exposure to the euro currency without holding physical euros. The trading idea behind the Fund is to provide investors with an opportunity to profit from changes in the value of the euro relative to the U.S. dollar.
The ETF is not leveraged but holds physical euro currency in a bank account to achieve its investment objective. This means that the Fund's returns will be influenced solely by changes in the euro-to-dollar exchange rate. The Invesco CurrencyShares Euro Currency Trust has an expense ratio of 0.40%, which is deducted from the Fund's assets and covers the costs of managing the Fund, such as research and trading expenses. As of 2023, the Fund controls $295.74 million in assets.
eToro - best for free ETF trading and investingProShares UltraPro Short QQQ (ticker: SQQQ)
The ProShares UltraPro Short QQQ (ticker: SQQQ) is an ETF that seeks to provide daily inverse exposure to the Nasdaq-100 Index, which tracks the performance of the 100 largest non-financial companies listed on the Nasdaq Stock Market. The ETF uses leverage to amplify its returns and provide up to three times the inverse return of the index on a daily basis.
The trading idea behind the ProShares UltraPro Short QQQ is to provide investors with a way to profit from a potential decline in the Nasdaq-100 Index. The ETF accomplishes this by investing in a combination of equity securities, futures contracts, swap agreements, and other financial instruments.
The ProShares UltraPro Short QQQ has an expense ratio of 0.95% and controls $4.87 billion in assets. The ETF's leverage can increase the risk and potential volatility of the Fund's returns, which investors should carefully consider before investing in the Fund.
When Should I Short USD?
Shorting USD isn't just about finding an opportunity. It's also about understanding the right conditions and timing for such a move. Here are three key factors you should consider before shorting the U.S. Dollar.
Fundamental Macro Trend
Generally, the dollar tends to weaken when the Federal Reserve cuts interest rates, and inflation is stable or low. Other long-term fundamentals that can lead to a decline in the dollar include increasing trade deficits, slowing economic growth, and rising public debt levels. These macroeconomic trends tend to have long-term impacts on currency valuations and should be monitored closely by investors looking for opportunities to short the U.S. Dollar. Find out how a declining dollar impacts your investments in the TU article.
Speculative Game
Shorting USD can also be a speculative game based on technical analysis signals. In other words, if you see certain price signals that suggest that USD is about to go down, then shorting it can be a good way to capitalize on those shifts before they occur. For example, if you notice that USD has recently reached an all-time high and has begun to break down from there, then this could be a sign that it is time to start shorting USD in order to take advantage of any potential declines in its value.
Hedging Your Position
Investors may choose to short USD as part of their overall hedging strategy – especially if they hold investments denominated in other currencies that may appreciate against the greenback over time. For example, suppose an investor holds large amounts of euros or British pounds. In that case, they may consider shorting USD to protect themselves from potential losses due to exchange rate fluctuations between those currencies and the U.S. dollar over time.
EUR/USD Price Prediction
The EUR/USD currency pair is the most widely traded of all currency pairs. Professional traders often turn to it to take advantage of its high liquidity and narrow spreads. As one of the world's major currencies, the euro and the U.S. dollar boast an impressive 80-100 pips of daily volatility, making them an attractive choice for many forex investors.
The highest trading volume for the EUR/USD pair is typically seen during American or European trading sessions. If you're keen to predict this couple's move, then T.U.'s indicator-based models provide valuable signals that can help inform and support your judgment. With such a wide range of features and signals available, it's no wonder that so many traders opt for EUR/USD.
Best 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 – no minimum deposit, spread from 0 pips, leverage up to 1:500. 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 fee is USD 20 with possible refund of the paid fee.
IC Markets – Best CFD Broker
The broker offers CFDs on all types of assets; there is also a demo account for testing strategies. The fee is zero, trading is available 7 days a week on MT4, MT5 and cTrader platforms. The leverage is up to 1:200 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 zero fees, 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.
FAQs
How can you short the dollar?
If you want to short the dollar, you can sell U.S. dollar-denominated assets, like stocks or bonds, or use a forex trading platform to sell USD against another currency. By doing this, you can potentially profit if the USD decreases in value relative to the other currency.
Is there an ETF to short the dollar?
Yes, there are ETFs that allow you to take a short position on the U.S. dollar. These ETFs allow you to invest in the movement of the USD without actually trading currency on the forex market. Examples of such ETFs include the ProShares Short USD ETF and the WisdomTree Bloomberg US Dollar Bearish Fund.
How do you short a dollar in Forex?
If you want to short the dollar in Forex, you can use a forex trading platform to sell USD against another currency, like EUR or JPY. This involves borrowing USD from a broker, selling it on the market, and then buying it back at a lower price to make a profit. However, forex trading involves significant risk, and it's important to clearly understand the market and your risk tolerance before engaging in any trading activity.
What is a short position on Forex?
It is opening a short position using the funds borrowed from the broker, which are immediately sold, and then bought back at a lower price in order to return to the broker. The difference between the sell and buy price is the trader’s profit.
Is it profitable to open a short position on the US dollar?
Profitability of a short position does not depend on the kind of the asset; short positions can be opened on currencies, cryptocurrencies, stocks, metals. Everything is determined by the price prediction. If the price prediction turns out to be correct, the trader will earn a profit.
What is the best way to open a short position on the US dollar?
You can short sell directly, but it is better to do it on ECN and STP accounts, and also use currency futures and CFDs. Each of these instruments offers its own benefits.
How to choose a broker for trading short positions?
Evaluate the conditions on the instruments you are interested in – available assets, fees, spread, leverage. Based on the summary of factors, choose the platform with the best conditions. TU experts recommend RoboForex and IC Markets.
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Team that worked on the article
Oleg Tkachenko is an economic analyst and risk manager having more than 14 years of experience in working with systemically important banks, investment companies, and analytical platforms. He has been a Traders Union analyst since 2018. His primary specialties are analysis and prediction of price tendencies in the Forex, stock, commodity, and cryptocurrency markets, as well as the development of trading strategies and individual risk management systems. He also analyzes nonstandard investing markets and studies trading psychology.
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.
The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.
Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.
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). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.