Going short – simplified

To understand opening a short position, let’s use the following simplified values:

Bid: 1 EUR = 2 USD
Ask: 1 EUR = 3 USD

If the trader decides to go short, they are selling euros and buying dollars at the bid price, in the hope that the dollar goes down against the euro.

This means that for every 1 euro you sell, you buy 2 dollars.

In time, if the dollar does go down against the euro, this is illustrated with the following:

Bid: 1 EUR = 1.25 USD
Ask: 1 EUR = 1.5 USD

The trader can now buy back euros at the ask price, meaning they pay 1.5 USD for every euro and retain 0.5 USD as profit.