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Benefits of Short Selling |
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Short selling adds uniformity to trading by allowing traders the potential to profit in down markets. Even when a market is bullish there are always some currencies falling. However, extremely few currencies rise to any appreciable degree during a bear market. Whether they are liquidating in a bear market or profit-taking in a bull market, short sellers can always locate a chance to sell short for a profit.
When a pair rises, it often increases slowly due to incremental profit taking throughout the rise. However, when a pair declines, it tends to do so very rapidly and severely. Short sellers position themselves in order to take advantage of a drop in the price.
Price often rallies slowly, with gradually increasing volume providing the power to make the upside move. As price begins to reach a level, look for the volume to start to decrease. This is where short traders often attempt to execute the short trade, seeking for the reversal of trend to begin.
As the price reverses to the downside, it often does so with far more momentum and force than the up move. In the case of panic selling, volume will increase until the selling begins to subside. At that point, buyers will begin to move back in and short traders will see their profits.
Volume is probably the most useful indicator in determining trend strength and warning of potential reversals, as well as an indicator of whether traders are buying on weakness and supporting price or selling into strength and limiting price. Volume has a direct relationship to price. The more buyers the higher the price goes; the fewer buyers, the better the chance the price will lower.
There are six simple rules to learn to interpret price and volume movements:
1. Increasing volume on increasing price points towards increasing buying pressure and a possible price advance.
2. Increasing volume on decreasing price points to increasing selling pressure and a possible price decrease.
3. Decreasing volume on increasing price shows easing buying pressure and a possible price plateau or reversal.
4. Decreasing volume on decreasing price signifies a slowing of selling pressure and a possible price plateau or reversal.
5. Higher-than-normal volume (a/k/a spikes) at price highs indicates selling into strength and a price ceiling.
6. Higher than normal volume (a/k/a spikes) at price lows indicates buying on weakness and price support.
Tip: For the short seller looking to position near the top of a rally, a progressive decrease in volume as price continues to rise will be the first indicator of a potential trend reversal. It will happen before any other indicator begins to suggest an impending price reversal.
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| Symbol |
Rate |
| GBP:CHF |
2.007608 |
| GBP:JPY |
182.222212 |
| GBP:USD |
1.757198 |
| NZD:USD |
0.658397 |
| EUR:CAD |
1.503413 |
| EUR:CHF |
1.557680 |
| EUR:GBP |
0.775889 |
| EUR:JPY |
141.384148 |
| EUR:USD |
1.363390 |
| AUD:JPY |
80.415028 |
| AUD:USD |
0.775455 |
| USD:CAD |
1.102702 |
| USD:CHF |
1.142505 |
| USD:JPY |
103.700427 |
| USD:SEK |
7.185028 |
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Disclimer: This website is for informational purposes only and is not intended to provide
specific commercial, financial, investment, accounting, tax, or legal advice.
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© ForexCenter.com, 2005, All Rights Reserved
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