Do you know how to short a stock? Not everyone is a floor trader and understands how. The process is actually very simple. You borrow shares from your broker and sell at resistance levels, creating a negative position. As price falls, you look to buy at support levels and cover your position and then your trade evens out. You keep the difference between where you sold and where you bought back. This process is done automatically within your brokerage account. It’s important to choose a good broker like SpeedTrader, Interactive Brokers, or Centerpoint because they are specialty brokers for short locates.
Short selling is one of many strategies that allow you to make a profit in the stock market. In fact, the fight between buyers (bullish) and sellers (bearish) in the very foundation of the stock market.
How to Short a Stock & How Much Money Do You Need?
- When looking for how to short a stock you need to first think the opposite of going long.
- Sell high at resistance, then buy low to cover at support levels and keep the difference.
- Look for doji’s, spinning tops, hanging man candles.
- When price falls below reversal candles, look for potential short using top of reversal candle as a stop.
- How much money do you need to short a stock? If you want unlimited shorting capability then you need at least $25,000 in an account. If you have less then you can only do 3 short trades within a 5 calendar day period.
The stock market trades in cycles. Sometimes the bulls are in control and other times the bears are. The important thing for traders to do is be able to trade any market.
Knowing how to short a stock is an important skill to learn. Short selling is borrowing a stock from your broker, selling the stock then buying it back.
Once you’ve covered your position, the shares revert back to your broker and you pocket the difference. In essence, you’re betting the stock’s price is going to drop.
Not all brokers have the capability of shorting every stock. If shorting is your thing, make sure you have a broker that can find shares to short. Interactive Brokers has a great reputation as a shorting broker.
Just like anything in stock market trading, shorting can be risky. There’s always a chance a trade can go against you. However, as long as you employ proper risk management, you’ll keep your losses small.
One thing to remember in learning how to short a stock is that you’re speculating You believe a stock will go down in price. If you bet wrong, you need to cut your losses quickly, especially when trading penny stocks.
In essence, you can lose more than you invested when selling short. That’s different then buying because you can only lose the amount you paid. That’s not the case with shorting.
For example, lets say you believe that a stock is overvalued and will be changing direction. It’s trading at $35 and you believe it’s going to do down in price. You decide to short the stock.
Instead of going down, it continues to climb. Hence you can lose an infinite amount. However, that probably not going to be the case. You’d close out the trade before that.
Stop losses are great at protecting you from that. If you’re only willing to risk a 10 cent per share loss, you’d set the stop loss 10 cents above your buy in price.
Shorting is risky but with this in mind, implementing proper risk management will keep that risk at a minimum.
If you look up how to short a stock you may see people talking about speculation. While you may believe a stock is going to go down or is overvalued, you need confirmation.
Luckily there are patterns for that. Candlesticks patterns form from the tug of war between buyers and sellers. These candlesticks and patterns allow you to see how other traders are feeling about a stock.
Hence the importance of knowing how to spot patterns. This allows you to confirm your speculation that a stock is going to go down. Tweezer top patterns are some of the most common bearish patterns found on intraday charts.
When you’re using day trading strategies along with patterns like the tweezer tops, then you can be very successful at shorting.
Take the time to study and learn bearish patterns. This way you won’t be guessing or relying on others to tell you how to trade. You can learn more about patterns by taking our candlesticks patterns course.
Is Short Selling Ethical?
- Short selling is absolutely an ethical trading strategy. It’s part of the normal day to day trading of the stock market. It’s important to understand the risks of short selling though and there are broker limitations for short locates, however, the process itself is ethical. Though, many have aversions to doing so. Take the last 12 months for example. Hedge funds were shorting $GME (Gamestop) and retail traders were buying. It was an epic battle of longs vs shorts, with the longs (the average guy) beating the evil hedge funds who love to short. So, if you’re vocal about shorting a stock, you’re bound to attract more enemies then if you long a stock. But its a perfectly fine way to trade…if you know what you are doing. The hedge funds lost a LOT of money being short $GME. That is why you must always have a stop.
Technicals on How to Short a Stock
Knowing how to short a stock using technical indicators is another great strategy. Since shorting usually occurs when day trading, the VWAP trading strategy is a good one to know. VWAP usually acts as strong support and resistance.
When shorting a stock, you can use a break below VWAP as an entry with VWAP as your stop. This tends to be a common strategy employed by day traders.
Moving average lines are another indicator you can use. The simple moving average formula can also act as support and resistance as well as a buy and sell signal.
Moving average crossovers, whether simple moving averages or exponential moving averages, are strong indicators to buy and sell. When a bearish cross happens, you can ride that move on down.
There are many different strategies you can employ to successfully short a stock. Find the one that you’re most comfortable with and hone the skill.
Learn How to Short a Stock With Practice
It’s important to practice how to short a stock. It can be risky and practice is important. Open a paper trading account and try out different shorting strategies.
It’s important to make hundreds of practice trades before using real money. Because the potential for infinite loss is there, you need to be able to keep a handle on your emotions. Practicing allows you to see how it works and if it’s for you.