The stock market has exhibited some very erratic behavior recently, making it difficult for investors to find safe bets, even when short-selling during downward trends. Market observers argue short selling currencies is easier in the foreign exchange (forex or FX) market in part because a currency is always getting shorted in an exchange investment. Currencies are traded in pairs, with one currency always being shorted in the exchange. Given this setup, investors may find shorting the Australian dollar/U.S. dollar pair is making for a great hedge against other investments as the pair trends down. For more on this continue reading the following article from Money Morning.
There’s never been a better time to be a short-seller.
Right now stocks are slipping and sliding all over the place, overall trending downward. And it doesn’t look like this downtrend is going anywhere soon.
Short-selling can help you protect your overall portfolio when stocks start sliding off the map. Also, you can earn some of the fastest profits from short-selling in "down" markets because markets drop a lot faster than they rise.
We saw that over the last few weeks as the Dow Jones Industrial Average and Standard & Poor’s 500 Index erased all their 2011 gains in a couple of days. That’s pretty common. In fact, it usually takes an index all year to gain 10% to 20%. Then it can drop as much as 30% in a week.
So if you were able to short stocks during those times, you would make a decent return for a full year within weeks, or even days.
However, it’s not always easy to execute short- sells in the stock market – which is why I always look for the best short-selling opportunities in foreign currencies first.
And I just found the ideal short-sell in the forex market to play as markets fall.
Why to Use the Forex Market for Short-Selling
Many countries are instituting a ban on short-selling some stocks, making it hard to take advantage of market downtrends.
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France, Spain, Italy, Belgium, Greece, Turkey and South Korea recently have created some rules against short-selling.
With a short-selling ban in effect, it means even if you believe a stock will drop in value, you can’t try to profit off that decline by simply shorting stocks.
Luckily, there will never be any short-selling bans in the f orex market.
You see, currencies are traded in pairs. When you buy the first currency listed in the pair, by default you’re also shorting the second currency in the pair. And if you short the first currency listed in the pair, you’re automatically buying the second currency.
So if I bought the EUR/USD (the euro vs. the U.S. dollar), I’m buying euros and shorting dollars at the same time. If I shorted EUR/USD, I’m short the euro and long the dollar.
In other words, you’re always shorting something. That’s why there will never be "short-selling bans" in the spot f orex market.
It also means that with currencies, you can just as easily profit in a "down market" as you can in an "up" market.
Even better – what if there was a "stock-market sensitive" currency in the forex market: As stocks dive, this currency would dive; as stocks rise, it would rise.
Thankfully, that pair does exist.
The Currency Short Sale to Make Now
It’s the AUD/USD (Australian dollar vs. the U.S. dollar).
The AUD/USD has been in an uptrend as long as stocks have. This pair also traded sideways just like stocks did. That caused it to form a chart pattern called a "double-top" at the same time that stocks did.
Now it’s started its downtrend, just like stocks.
Simply shorting this AUD/USD pair is like shorting the Dow or S&P 500. And since it’s a currency pair, it’s much easier to short-sell it in the f orex market.
It’s one of the best hedges you can use to take the sting out of your portfolio as stocks drop. If the Dow really starts falling, your AUD/USD short position will grab even more profits.
Most people don’t realize that such a simple solution is out there, but it is. Therefore, take advantage of this time in market history. Simply shorting the Aussie dollar in the f orex market is the easiest way to do that.
This article was republished with permission from Money Morning.