What Is a Basket Of USD Shorts?

A basket of USD shorts is a forex trading strategy that involves selling the U.S. dollar against a group of currencies, instead of against a single currency pair. The currency group that the USD is traded against in such a situation is referred to as a "basket." The strategy thus pays off if the dollar falls in value relative to several currencies at once.

Key Takeaways

  • A basket of USD shorts is a forex strategy where the U.S. dollar is sold, while taking a long position in a basket of several other currencies.
  • The trade is a bearish-U.S. dollar strategy that pays off if other world currency appreciate against the USD.
  • Using a basket reduces the trade's overall risk exposure through diversification.

Understanding Basket Of USD Shorts

A basket of USD shorts is a strategy is generally employed by traders who are bearish on the U.S. dollar, and who would prefer to have a short trading position on the USD. Generally, traders who choose to use a basket of USD shorts as their strategy have a bearish outlook on the U.S. dollar and expect that its value is on the decline. They might use different trading signals to determine this outlook for the USD.

Using a basket to short the USD allows traders to reduce risk through diversification. If a single currency has a big drop in its value, a trader who uses this strategy will not suffer as big of a loss compared to if they had focused on a single currency pair. And if the U.S. dollar strengthens appreciably, a trader might lose less with this strategy since the USD might appreciate at different rates against different currencies. Several factors can contribute to currency appreciation including interest rates, government policy, trade balances and business cycles.

In general, when traders employ a short position, or a short, they sell first and buy later, because they expect the sale price is higher than the price that they will buy at later. It’s a strategy that traders use when they believe the price of an asset will decrease and they want to profit from the decline.

Forex Trading Strategy

A Basket of USD shorts is one of many different forex trading strategies used by foreign exchange traders to determine whether to trade currencies at any given point in time. These strategies are used in the foreign exchange market, or forex, which is the world’s largest and most liquid market and includes all the currencies in the world.

Some forex trading strategies are based technical analysis or chart analysis while others are based on events in the news. Traders consider several different factors and components when creating a forex trading strategy. These include selecting a market, position sizing, entry points, exit points and trading tactics.

Traders can keep evolving or changing their forex trading strategies as market conditions change and to better respond to the risk versus the reward of a particular strategy.