A trader can make money if they expect the value of the British pound sterling to fall by what is shorting the pound it. Traders can also short currencies relative to other currencies, which can be driven by economic expectations or technical trading strategies. To short a currency, you can buy a contract that stipulates that you will sell it at a certain price in the future. Individual investors can do this through spread bets or contracts for difference (CFDs). Exchange-traded funds (ETFs) that allow you to short assets have also proliferated.
This is a complicated area, as there are many factors that affect the price of the pound and the overall market. In general, the pound falls when the market anticipates a negative event such as political uncertainty or a recession in the UK economy. The pound rises when the market anticipates an event that could be positive such as higher interest rates or a rebound in the UK economy.
Navigating Brexit Uncertainty: A Guide to Shorting the Pound
IG’s trading expert Chris Beauchamp said that most ordinary people who try to short the pound “don’t understand how it works.” It takes a lot of knowledge about the market and the economy. For example, you need to know what is driving the pound’s price down and how to interpret the charts. Then you need to be able to decide exactly when to short the pound and get in before any quick rebounds. These rebounds can create a so-called short squeeze, where the market moves against you and forces you to sell at a loss.