Short selling in the stock market is limited. It is something one must be careful to do correctly and with an eye towards the restrictions in place. The foreign exchange market is different. Short selling has no restrictions because there are times you have to sell instead of buy to make a profit. In fact you are always buying and selling, but when you sell the base currency and buy the quote currency it is called going short or short selling. Learn more about this concept below.
Foreign Exchange Market Short Selling
The stock market has to put restrictions on short selling otherwise everyone would try it and there would be large losses. It would also compromise the entire stock market since it is centralised. A decentralised market has better luck with short selling because of how it actually works. The foreign exchange market is about buying one currency, which means you have to sell the other currency. If you decide the base currency in the pair is not going to be the profitable currency, you would sell it to buy the quote currency. In the forex market this means you go short so you are short selling one currency to make a profit. In this way you can operate on both the downward and upward trends.
To bring this point home a little further, consider the AUD/USD. It is one of the major pairs in which the Aussie dollar is the base currency. If you believe the AUD is going to decrease against the USD, you would sell it. A good example would be mid July 2013, when the USD was on an increase for several weeks including throughout June. It naturally meant the AUD would be weaker against the USD. In the foreign exchange market this would mean you sell the AUD in favour of the decreasing USD rates. A decreasing USD rate means it is appreciating against the base currency.
The AUD, as the base, is equal to 1.0000 in forex. If a rate is lower than 1.0000 like .9700 it only takes .97 to make 1 AUD. In other words it takes .97 cents USD to make 1 full Aussie dollar.
Foreign Exchange Market: Football Field Long Trades
Long trades are the opposite from short selling. You buy the base currency instead of the quote currency because you believe the base currency is going to profit. You would think the quote currency is going to go from .9700 rate to 1.1000, for example. If the quote currency in the foreign exchange market becomes 1.1000 it now takes 1 dollar and .100 cents USD to make 1 AUD. You can see that it takes more USD in this scenario to make 1 AUD. You would want to make a profit on any trade, which means you would need to account for which currency is actually going to gain in value. A pip movement up on a buy makes money. A pip movement down on a sell also makes money. This is why it is important to understand the concept of short selling and going long.