Shorting from the first steps to practice – what you really need to know

What really happens when you short?

Short selling is not just a theoretical concept – it is a specific trading strategy that allows you to profit from a decline in prices. Simply put: I borrow an asset (, for example, Bitcoin or a stock ), sell it immediately at a high price, and then hope to buy it back later at a lower price. The difference goes into my pockets. This is the basic logic, but the practice can be much more complicated.

How does short selling work step by step?

Let's start with a specific situation. Suppose you think the price of an asset is too high. What do you do in this case?

The first step: securing collateral You are working on a margin account or futures platform. You are not trading with the full amount of your own money - you only submit a fraction as initial margin. For example, if you have 1000 dollars in free capital and want to trade with 5x leverage? Then you can work with a position of 5000 dollars. This is the initial margin requirement.

The second step: borrowing and immediate selling A platform or broker lends you 1 Bitcoin ( or other assets ). You immediately sell it for $100,000. Now you have an open short position and are paying interest on the borrowed amount.

The third step: the price drop ( or the opposite ) If the price drops to $95,000, exactly what you hope for will happen. You buy back 1 BTC and return it to the lender. The profit: $5,000, minus interest and fees.

But what happens if you have a bad forecast? If the price rises to $105,000, you will be facing a loss of $5,000 – and this is just the beginning.

Shorting a stock is different, but the principle is the same.

An investor believes that XYZ Corp's stock, which is currently trading at $50, will decrease. He borrows 100 shares and immediately sells them for $5000. The price drops to $40. He buys back 100 shares for $4000, returns the assets, and realizes a profit of $1000. Simple, right? But only if the market goes with you.

Why is tracking margin levels so critical?

Here comes the real challenge. During short selling, you must continuously monitor your margin level. This essentially means: how much “buffer” you have left in the position. The maintenance margin cannot fall below the minimum level.

We will go through the realistic scenario:

• You are shorting a $1000 position with 5x leverage. You have $200 as collateral.
• The price moves in the opposite direction. $150 disappeared from the position.
• Your margin level: a critical point is approaching.
• When it falls below a certain level, a margin call occurs: the broker asks you to deposit more money immediately, or your position will be liquidated.

This is not a very beautiful process. Liquidation occurs when the worst happens for you – when the price is already higher, and you are scared yourself.

What makes short selling so risky?

The possibility of unlimited loss

The most important thing: while in a long position, your maximum loss can extend to the price dropping to zero, in the case of a short position, theoretically there is no limit. The price can continue to rise and rise. This is not just a loss of money – this is money that you didn't even have.

The real nightmare of a short squeeze

In 2021, the GameStop situation showed what could happen. The stock underwent sharper, more intense pressure as retail investors consciously drove up prices to “squeeze” the short sellers. Anyone who was in a short position at an unfavorable time suffered massive losses. This is not just a story - it is a real market phenomenon.

The fees and interest of the loan

Borrowing the asset is not free. Especially for those assets that are in high demand, significant interest can be paid. In the case of long-term shorting, these costs can eat into or exceed potential profits.

Dividends and other expenses

If you short a stock, you have to cover the dividend payments – even though you are not the owner. This is an additional burden.

When and why does someone profit from short selling?

Speculation: You believe that the price of an asset will decrease. You turn this conviction into a trading position.

Hedge: You have a long position in an asset, but you are worried about a sudden price drop. You offset potential losses with a short position. This is especially useful in volatile markets.

Arbitrage: Theoretically, you buy and short identical assets at different prices to take advantage of the difference.

In practice: what should we pay attention to?

1. Trading rules: The uptick rule, for example, restricts short selling during rapid declines. The SEC SHO regulation prohibits naked short selling. Familiarize yourself with the regulations in your region.

2. Choosing a Platform: The shorting conditions of cryptocurrency markets differ from those of traditional markets. There are platforms where shorting is easier, and there are those where it is more expensive.

3. Position Sizing: Never invest an amount that you cannot afford to lose. Shorting comes with extra risk.

4. Setting a stop-loss: Define an exit point for every short position. Do not rely on spontaneous decisions under emotions.

The big picture: shorting = double-edged sword

Short selling can indeed be a useful tool for portfolio diversification and taking advantage of market volatility. However, it is by no means a beginner-friendly strategy. History is filled with professional traders who have gone bankrupt due to extraordinary short selling losses.

If you decide to short, start small, with only an amount you can afford, and keep an eye on all parameters: margin level, borrowing fee, and market movements. The profitability and risk of shorting are directly related to your discipline and self-control.