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What Is Short Selling?

Short selling is the act a trader takes in selling a stock or instrument in the hope that it decreases in value. Traditionally, especially in physical markets, traders or investors did not have the ability to sell without first owning the underlying asset. However, with the introduction of digital brokers and the popularity of CFDs more and more traders jumped on the opportunity to sell markets they had no ownership in.

Although very simple, the concept of a short sale is a topic many new and experienced traders still struggle to fully get to grips with. We break down this topic below to allow traders of all levels to better understand it’s full working. 

How Does Short Selling Work?

Short selling works as follows. When a trader shorts an instrument they are essentially entering an agreement with a buyer, selling at their requested price, and anticipating the markets price decrease to take place, meaning they sold high and bought low prior to delivering the asset to the purchaser.

Here are 2 examples of how this works. I will give one generic example and 1 example relating to a trade.

Example 1 

Okay so imagine you are a car dealer, your job is simply the sale of a vehicle. Let’s imagine you have a customer who wants a 2019 BMW, you sell this for £10,000, and the delivery date is for 1 month from the date the sale took place. In the time between the sale and the delivery, you try to find someone else selling the same car for £8,000, you buy this from them and sell it on to the buyer for £10,000, meaning you secured a £2,000 profit.

Example 2

Now we get a basic understanding, let’s look at it from the market’s perspective.

You are trading Crude Oil. You believe there will soon be an oversupply and you want to sell. Via CFDs, you say $55.90 is the price from where you believe the value will fall. You have agreed on a price of sale with a buyer, highlighted by the red arrow, now you wait for the market to go down to the red tick. Once it does you buy Crude at the lower price of $53.55, knowing you already have an agreement to sell at $55.90. Your profit is the difference.

Strategies for Short Short Selling?

Regardless of the direction you believe the market may move, most traders are likely to have a range of strategies that assist in making these decisions. Deciding where to enter is no easy feat. So below look at a few basic strategies short sellers use for there entry positions.

Strategy 1 – Selling at resistance.

Most traders believe the resistance level is the price point where we see markets usually start to fall after a bull run. As a result, a lot of traders will place a sell order at this level as they believe it will be a good point of entry. 

Below you see how firm the resistance is held, each time the markets hit the resistance, we see a sell off takes place.

Strategy 2 – Selling at Overbought –  Relative Strength Index.

With the RSI traders traditionally look at the level of 70 and above to be Overbought, so whenever the markets near that level we traditionally the potential for shorting increase.

As you can see below, each time the RSI hits or gets close to 70, the trend heads downwards as the selling volume begins.

Pros and Cons of Short selling

Pros

  • Diversification
  • Profit not only when markets are up
  • Can use to hedge longer-term investments (long position)

Cons

  • Profiting from a decline in stocks
  • Pessimistic approach to investing
  • High risk in shorting stocks, which historical rise

Best Brokers for Short Selling?

The best brokers for short selling are usually those who allow hedging, have low spreads, good execution speeds and generally reliable. Short selling can be one of the riskiest areas to place a trade, especially in stocks, so brokers would need to offer the above and more, to help ease your mind when trading with them.

Here is our list of the best brokers for shorting:

1
Min. Deposit
$50
Exclusive promotion
Our score
10
Accepts customers from the USA
Offers 15 crypto coins to buy&sell including BTC, LTC, ETC, NEO and more
Trade on the world's leading social trading and investing platform
Start Trading
Description:
eToro offers a wide range of cryptos, such as Bitcoin, XRP and others, alongside crypto/fiat and crypto/crypto pairs. eToro users can connect with, learn from, and copy or get copied by other users.
Payment Methods
Wire Transfer, Bank Transfer
Full regulations list:
CySEC, FCA
2
Min. Deposit
$10
Exclusive promotion
Our score
9.3
24/7 Support for all Traders
Trade Margins, Indices & Futures
Highly-rated mobile app with super low rate fees
Start Trading
Description:
As one of the largest and oldest Bitcoin exchanges in the world, Kraken is consistently named one of the best places to buy and sell crypto online, thanks to our excellent service, low fees, versatile funding options and rigorous security standards -- but this is only part of the story. We’ve been on the forefront of the blockchain revolution since 2011.
Payment Methods
Credit Card
Full regulations list:
3
Min. Deposit
$1
Exclusive promotion
Our score
8.7
FCA regulated crypto exchange with 4500+ digital assets available for trading
Supports users from over 100 countries including the US and Canada
Withdraw your funds using PayPal or other payment methods
Start Trading
Description:
Coinbase is one of the first places that made it easy to buy bitcoin and has since become a widely trusted exchange in the market.
Payment Methods
Credit Card, Debit Card, Euro Bank Account, 3d Secure Credit Card
Full regulations list: