How to short the pound – a step-by-step guide

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The Generation Money Guarantee

At Generation Money our purpose is to help you make better financial decisions. All of our articles are independently written and/or edited by finance professionals and adhere to strict editorial guidelines. This post may contain links which, if clicked, could result in a payment to the site. These links never impact our editorial policy and all rankings and product recommendations remain unbiased. For more details, read how this site is financed.

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In this guide we show you how to short the pound.

I’ve been using my own money to trade FX online since 2006 and, although my patriotic side doesn’t like it, I’ve shorted the pound plenty of times!

How to short the pound

To short the pound, or any instrument in the UK, you’ll be trading Contracts for Difference (CFDs).

First we’ll walk through how to short the pound using XTB, our recommended FX platform. As I take you through the steps we’ll explain how CFD trading works and how it relates to shorting the pound. 

I’ll then take you through a short GBP/USD trade I made in 2020 that netted a 25% return in two weeks.

Let’s get started.

Table of Contents

How to short the pound

These are the steps required to short the pound: 

  1. Pick a CFD broker (we recommend XTB – more on them below) and fund your account
  2. Choose which GBP currency pair you want to short (we recommend GBP/USD)
  3. Open a market order on that currency pair on the trading screen of your chosen CFD platform
  4. Choose the leverage you want to use, the size of the order and whether or not to use a Stop Loss (we show you how to do this below)
  5. Hit the Trade/SELL button to complete your order
  6. Monitor your order in the broker’s app or web platform and exit the trade when you think the time is right

Next, we’ll take you through how to do all of the above using XTB – our recommended CFD trading platform.

XTB logo
XTB logo

XTB

XTB is our top-rated CFD platform. It’s easy to use, has over 5,700 instruments to trade, low prices and no deposit/withdrawal fees.

Capital at risk if you invest. FCA regulated and FSCS protected.

How to short the pound using XTB

XTB is our recommended CFD platform in the UK. 

It has low prices on FX CFDs (overnight prices are cheaper than eToro’s), low spreads (also lower than eToro’s) and a very easy-to-use app.

XTB also pays interest on uninvested cash – and its rates are very competitive.

To show you how to short the pound on XTB we’ll be using the GBP/USD currency pair (sometimes known as ‘cable’). We’ll also explain why we’ve used this pair and explain some of the FX trading terms we use.

Shorting the pound in the UK means you will be trading a Contract For Difference (CFD).

CFDs Explained

A Contract For Difference (CFD) is an agreement entered into by you and your broker centred around the price of an underlying asset.

By entering a CFD trade, you and your broker each agree to pay each other the difference between the opening and closing price of an underlying asset without either of you owning it. Because the underlying asset isn’t actually involved, CFDs are considered derivative financial instruments (they derive their value from an underlying asset).

If you enter a BUY trade and the underlying asset goes up in price, your broker pays you. If the asset goes down in price, you pay your broker.

Because the underlying asset isn’t directly being traded, CFDs can be traded in multiples of the underlying asset’s price. This is where leverage comes in. Brokers will lend you several times the value of the underlying asset to amplify the trade.

For example, 1:5 leverage on a stock worth £100 means that you can enter a CFD trade worth 5 shares (5 x £100) and only need to put up £100 of your own money. Your profit or loss on the trade is also amplified by 5 times.

1. Open an XTB account

Head over to XTB’s website to sign up and open your account. 

To open your account, you’ll be asked to provide your name, address and other personal details for ID verification. This is standard practice when opening an investment account in the UK. 

As a CFD broker, XTB is required to ask you to complete some questions on CFD trading to ensure you understand the risks.

XTB sign up questions
XTB, like all CFD brokers, will ask you questions when you sign up to test your CFD knowledge

Once you’ve signed up and verified your account, you’re able to fund it. All deposits and withdrawals with XTB are free (your bank/payment provider may charge their own fees, though).

2. Choose which GBP currency pair you want to short

As an experienced FX trader, my primary currency pair when trading the pound is GBP/USD. This is a measure of the pound vs the US dollar and is expressed in how many dollars one pound is worth.

For example, if GBP/USD is priced at 1.25 it means that £1 is worth $1.25.

I use GBP/USD because it has the most liquidity of any GBP currency pair and very low spreads. 

To short the pound you’re effectively betting that the pound will weaken in value. In this case, it means we believe GBP/USD will go down – because we expect £1 to be worth less in dollar terms. 

As outlined above, to short GBP/USD you will be entering a SELL CFD trade with your broker. 

Navigate to the GBP/USD instrument in the XTB app:

XTB's trade tab for shorting the pound
GBP/USD is usually near the top of the Trade tab in the XTB app. Click on it to be taken to the instrument window

You can either search for GBP/USD in the Discover tab, or head to the Trade tab where GBP/USD is usually near the top. Simply tap it and you’ll be taken to the instrument window.

More about currency pairs

To trade FX online using CFDs you will need to buy or sell a currency pair. 

This is because each individual currency is measured in reference to its value against another currency. 

The British Pound is often compared in value to the US Dollar (USD), the euro (EUR), the Swiss Franc (CHF) and the Japanese Yen (JPY). 

For each currency pair, one of the currencies will be the ‘base’ currency. This is the currency that’s quoted first, e.g. the pound is the base currency for GBP/USD. When the pound is traded against the euro it’s quoted as EUR/GBP, where the euro is the base currency. 

3. Open a GBP/USD market order on the XTB platform

Once your account is set up and funded, to short the pound you’ll need to search for and navigate to GBP/USD. 

It looks like this in XTB’s app:

GBP/USD when shorting the pound on the XTB app
GBP/USD on the XTB app

Now, you’ll need to decide how much you want to trade when shorting the pound. 

Leverage and choosing the size of the order

It’s important to understand that CFDs allow you to use leverage when trading.

Picture of Alex's View

Alex’s View

Founder, Generation Money

Leverage applies to CFD trading and is a form of lending. Brokers that offer CFDs, like XTB and eToro, allow you to multiply up your potential position in a trade by lending you the money to do so.

To do this, CFD brokers have lending facilities in place with institutional banks. Think of a very large overdraft. 

Brokers borrow money from banks using this facility and re-lend this money to you, the client, when you trade with leverage. They will charge you interest to do so, which is a mark-up on the interest rate they are charged by their bank.

For example, a CFD broker may borrow money at an annual rate of 5% from an investment bank. When you trade CFDs using leverage, the broker lends you several times the value of the margin you put up to increase the size of your position. 

For each day that you hold your trade position, the broker will charge you interest – usually at a significant mark up on the rate they’re charged by their bank. On some instruments this will be around 10-12% but on certain others it can be as high as several hundred percent on an annualised basis!

This daily charge on CFD trades is called the Overnight Fee and it represents the daily rate of interest charged by lending you the money to amplify up your position.

CFD leveraging capabilities are regulated by the Financial Conduct Authority (FCA) in the UK. The FCA details the maximum amount of leverage that UK-based investors are permitted to access.

For example, if you deposit $1,000 with your broker they will usually offer leverage of up to 30:1 on FX. This means if you were to put $100 of your initial deposit into an FX trade, the trade would give you $3,000 worth of exposure.

Let’s say you enter a BUY trade with $100 at 30:1 leverage on GBP/USD which is priced at 1.25. If the price goes up by 10% from 1.25 to 1.375 and you exit the trade at this price you would bank a profit of $375 [(100 x 30 x 1.375) – (100 x 30 x 1.25) = $375].

As you can see, by putting up just $100 you’ve made a profit of $375 from a price movement of just 10%. This demonstrates how your profits and losses are hugely multiplied. Trading using leverage is a high risk activity.

Note that the price movement of 10% in this example is unrealistic – mature currencies such as the GBP/USD have very low volatility. Between 1980 and 2020 the average monthly movement was -0.07%!

There’s no choice over how much leverage to use when shorting the pound with XTB. All currency pairs are set at 30:1 leverage.

XTB prices currencies in ‘lots’, which is very common among FX trading platforms. With XTB, one lot has a nominal value of £100,000.

The minimum lot size to trade is 0.01 – in other words £1,000 of exposure. As discussed above, the leverage offered on currencies with XTB is 30:1 which is typical in the industry. 

This means the £1,000 minimum trade size requires you to put up £33.33 to open the trade (£1,000 divided by 30). So, £33.33 is the minimum amount required to short the pound with XTB.

If you were to trade 0.03 lots, or £100 margin, then your trade size would be £3,000.

At Generation Money we recommend no trade takes up more than 10% of your portfolio – in this case, your deposit into your XTB account.

If you follow our risk management recommendation then you’d need to deposit £1,000 and open a trade to short the pound with £100 of margin.

GM Tip: ‘margin’ is the amount of money you put up to enter a trade. Your margin comes out of your account balance, so if you deposit £1,000 into your account and use £100 to trade then you’re using a margin of 10% of your balance.

Hit the SELL button to complete your order

This is the easiest – and most exciting – step.

Once you’ve decided how much margin to use, hit the SELL button on the GBP/USD window in the XTB app:

The market order screen in the XTB app to short the pound
The market order screen in the XTB app – hit the SELL button in red to short the pound

As well as the overnight fees (daily swap in the above screeshot), you’ll also see the cost of the spread on the order window. XTB has some of the lowest Forex (foreign exchange) spreads of the CFD trading platforms we’ve reviewed.

What’s the spread in FX trading?

The spread is the difference between the buy (bid) and sell (ask) price of a currency, or other instrument. The difference between the two prices allows a broker to make a profit on each trade.

Let’s look at a ‘buy’ trade on a currency pair as an example. Essentially, a broker will ‘sell’ you a currency that you’re buying at a slightly higher price than its market value. The broker keeps the difference between the ‘bid’ price it quotes to you (as the buyer) and the actual market price.

It’s a bit like charging a markup on an item to make a profit.

When shorting a currency, the broker ‘buys’ the currency from you at a slightly lower price than the market price. Again, in this way it makes a small profit on the transaction.

In FX trading the spread is typically priced in ‘pips’. A pip is 1/1,000th of a currency’s price. As an example, if GBP/USD is trading at 1.2630, the ‘0’ represents one pip. If the price falls to 1.2620 then it’s fallen by 10 pips.

XTB logo
XTB logo

XTB

XTB is our top-rated CFD platform. It’s easy to use, has over 5,700 instruments to trade, low prices and no deposit/withdrawal fees.

Capital at risk if you invest. FCA regulated and FSCS protected.

Monitor your trade and exit it when you think the time is right

If you’re interested in how to short the pound you’ve probably already formed a view as to why it might go down in value.

So, make sure you know when it’s a good time to exit the trade. Have your target price in mind before you enter it.

You should also make sure you have the discipline to exit the trade and protect your capital if the market goes against you.

Why short the pound?

Historically, interest rates have been the most important factor in Forex trading. This is because they represent the risk-free rate of return of putting your money into that currency’s country. 

In theory, the higher the interest rate of a currency the greater the demand for it will be. Demand will be greater because more people (companies) will want to put their money into that country to get a higher rate of return. 

For example, an international company may want to put its spare cash into a bank account in the country that pays the highest interest rate.

As more money flows into that country, demand for its currency goes up. As demand goes up, so does its price. Therefore the currency is worth more. 

Since the financial crisis and up until the covid pandemic, the relationship between FX prices and interest rates was somewhat broken – at least in Western countries. This is because most Western countries held interest rates at close to zero in response to the financial crisis.

More recently, interest rates have risen across the West and the relationship between FX prices and interest rates has returned to an extent.

Leading indicators 

The direction of interest rates can be predicted by leading indicators – some of which are cross-correlated.

A leading indicator is a metric that may affect the future direction of interest rates. The most common example being a high inflation reading which would lead to the central bank raising interest rates. That’s an example I’m sure many people will be familiar with in recent years.

Leading indicators which affect the pound include the following, which are regularly published by official bodies in the UK:

  • Inflation (CPI and core CPI in the UK)
  • GDP growth
  • Unemployment rates
  • Manufacturing and services PMI

Other events will impact the above, too, including:

  • Political events
  • Speeches by key Bank of England Monetary Policy Committee members (they sometimes give hints as to future interest rate direction)
  • Government policy and spending (which is expected to affect the economy and therefore interest rates)

Essentially, you may consider shorting the pound when something happens that could lead to a cut in interest rates.

A word of warning, though. As we noted above, all currencies are priced in pairs. So, if you’re looking to short the pound by shorting GBP/USD you must also be aware of events in the US. These can affect the GBP/USD price in the same way as events in the UK.

For example, the pound may strengthen against the US dollar due to dollar weakness with little to do with the UK or the pound.

Leading indicators are used in both trading and investing. Read more about the differences between them in our trading vs investing guide.

How I shorted the pound in 2020 for a 25% return in two weeks

On the 11th March 2020 the Bank of England (BoE) cut the base rate from 0.75% to 0.25% in response to the beginning of the covid pandemic.

This was the first rate cut since August 2016 and the BoE moved ahead of the US Federal Reserve (Fed). 

As outlined above, interest rates are typically the primary driver of a currency’s value. So, I took the opportunity to short the pound on 12th March 2020 at a price of 1.2585.

My view was that other major central banks would soon follow suit, but until they did the pound was going to drop in value. And it did – quite significantly. 

An example of how to short the pound showing GBP/USD in March 2020
The red bars show the drop in the value of the pound when the BoE cut the central bank interest rate. The green bars immediately following are in response to the Fed cutting its rate

A few days later on the 15th March, the Fed cut its central bank rate to 0.25%. This was my cue to exit the trade.

For good measure, I then entered a BUY trade on GBP/USD at 1.1643 as I expected the pound to recover its value relative to the dollar. I exited this second trade at around 1.2055 on the 26th March 2020. 

In total, this netted several hundred pips in profit which is a nice gain in Forex trading. 

I didn’t go huge on this trade in terms of trade size but altogether I made a return of around 25% in those two weeks. Consider that the S&P 500 has historically averaged an annual return of 10%.

Not all FX trades will follow such simple logic. But make sure you understand the reasons why the pound might drop in value before you short it.

Is shorting the pound safe?

Trading CFDs comes with high risk. You could rapidly lose your money if the market moves against you. 

But using CFDs is the most common way for a retail trader to short the pound. In fact, shorting any instrument tends to be risky. 

XTB is an FCA regulated broker in the UK. It also has Financial Services Compensation Scheme (FSCS) protection.

This means that if XTB were to go bust your money would be protected up to the value of £85,000 by the regulator. 

Furthermore, as XTB is an FCA-regulated entity you’re able to complain to the Financial Ombudsman Service (FOS) if you cannot resolve a dispute directly with them. They must comply with rulings by the FOS.

All FCA-regulated CFD brokers in the UK are required to publish a risk statement on CFD trading with them. Here’s XTB’s:

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

How to short the pound – summary

We’ve explained how to short the pound using XTB, our recommended CFD trading platform. 

Open an account with them, complete the ID verification and compliance checks then fund your account. 

Once you’re all set up, navigate to GBP/USD (or another GBP currency pair of your choice) and enter a SELL order. You’ll need to decide how much of your margin (deposit) to use and the size of the trade (in lots). We recommend no more than 10% of your margin is used in one position.

Then, monitor the trade and make sure to exit when it reaches your target price. Or, if the trade goes against you, make sure you have the discipline to cut your losses without eating into your account balance too much.

XTB logo
XTB logo

XTB

XTB is our top-rated CFD platform. It’s easy to use, has over 5,700 instruments to trade, low prices and no deposit/withdrawal fees.

Capital at risk if you invest. FCA regulated and FSCS protected.

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