The Twist In The Trading Story

You don't need to own stuff before you sell it. And seriously, you don't even need to understand how that works. So you could skip the next couple of paragraphs.
 

Currency

Take for example GBP/USD. This is the Great Britain Pound (GBP) vs the United States Dollar (USD). Remember that the ordering is important. When you buy "GBP/USD", what you are actually doing is buying GBP using USD.

Let's change the example a little, to bring it back to something we do everyday. Instead of "buying GBP using USD", let's say we are "buying food using money". When you buy food, you hand over cash. You keep the food. You lose the cash. You are essentially buying food and selling cash.

Now think about it from the store's perspective. They sell the food, and get the cash. They are essentially buying cash with food.

So originally we had:

You - buy - food - lose - cash
They - sell - food - get - cash

And that can be changed to this:

You - buy - food - sell - cash
They - sell - food - buy - cash

And if we revert that back to our currency example:

You - buy - GBP - sell - USD (which is going long GBP/USD)
They - sell - GBP - buy - USD (which is going short GBP/USD)

When you go long, there is always a counter-party going short, and vice-versa.

And that is why you can sell (go short) a currency without owning it first. Because to go long GBP/USD is buying GBP with USD, and to go short GBP/USD is buying USD with GBP. You're actually buying in both instances.

Now you're going to say "But the money in my account is in Aussie Dollar! How do I use USD to buy GBP, or GBP to buy USD??". And the answer is, don't worry about it :-) Your broker will do some magic behind the scenes.
 

Shares

You can sell shares without owning them, but this is only possible on some exchanges, and only if your broker already owns those shares.

What your broker does is lend you those shares, and then you sell them. That's how you can sell shares without owning them - you are actually selling someone else's shares!

Hopefully for you the price goes down. Later you buy the shares back so you can give them back to your broker.

The normal order of events is of course to buy shares, then sell them at a higher price.

When you think the price is going down, however, you still do the buying and selling, but you do it in the opposite order. First sell, then buy. This probably sounds weird, but remember that you are selling someone else's shares. So really the order of events is:

1. your broker bought the shares
2. they lend the shares to you
3. you sell the shares
4. price goes down (hopefully)
5. you buy the shares
6. you give the shares back to the broker
7. you pocket the difference
8. everyone's happy :-)

In both cases you want to do the buying at a lower price, and the selling at a higher price.
 

The Realisation

Hopefully you now understand that you can make money whether the currency or share price is going up or down. You should no longer care when the news tells you that the share market crashed, or if it's booming. All you need to do is be on the right side of the trade. If you think the price is going up, you buy (go long). If you think it's going down, you sell (go short).