The meaning of short selling and trading practices: how to profit bidirectionally amid market fluctuations?

“The Way that can be told of is not the eternal Way.” Stock market fluctuations are normal; some profit from going long, while others profit from shorting. But most retail investors only think about buying when prices rise, unaware that smart traders have already learned to seize opportunities during declines. So what exactly does shorting mean? Can it really help you profit against the trend in a bear market?

What exactly is shorting? Explained in the simplest terms

Shorting is “sell high first, buy low later”—this simple phrase captures its core essence.

Specifically, when you expect an asset’s price to fall in the future, you can borrow that asset from a broker, sell it at the current price, and then buy it back after the price drops to return to the broker, pocketing the difference. This trading logic is completely opposite to traditional long positions.

Sounds a bit complicated? Let’s understand with a real example:

Suppose a stock is currently priced at 100 yuan. You predict it will fall to 70 yuan. You borrow this stock from a broker and sell it at 100 yuan (receiving 100 yuan cash). Three months later, the stock price indeed drops to 70 yuan. You buy back the stock at 70 yuan (spending 70 yuan) and return it to the broker. After deducting fees and interest, you earn a 30 yuan profit. That’s shorting.

When should you consider shorting?

Shorting isn’t something you can do all the time. It’s useful in these situations:

Scenario 1: You are bearish on the future market
When fundamental analysis, technical signals, or macro data suggest an asset is overvalued and the market is about to correct, going long is clearly the wrong choice. Shorting allows you to profit rationally when others panic.

Scenario 2: To hedge your heavy holdings
If you hold a large position in a stock but don’t want to close it in the short term, and are worried about market risks, you can short the index or related stocks to lock in risk—this is a classic hedging strategy, often used by institutional investors.

Can all assets be shorted?

The answer is yes. Stocks, forex, bonds, indices, even derivatives like futures and options can be shorted.

The most direct method is stock margin trading. If your brokerage account meets certain conditions (e.g., US stocks typically require at least $2000 and a 30% net asset ratio), you can directly borrow stocks to short.

Besides, there are three advanced methods to achieve shorting:

• CFD (Contract for Difference): Trade multiple assets with less margin, with thresholds as low as $50
• Futures contracts: Trade commodities, stock indices, etc., but require more trading experience
• Inverse ETFs: Buy funds designed to go short, managed by professional teams

Why is shorting so important? What are its benefits?

You might wonder: since going long can make money, why bother shorting? That’s a good question.

First: Shorting stabilizes the market
Imagine a market without shorting—investors can only go long, leading to frantic chasing during rallies and rapid crashes when reversals happen. Many bull or bear markets (like certain stock markets during specific periods) are characterized by such violent swings. With shorting, the forces of bulls and bears constantly battle, making price movements more stable and rational.

Second: Shorting bursts bubbles
When a stock is severely overvalued and a bubble is forming, shorting institutions act like “whistleblowers.” They push down the stock price, forcing the market to reassess the company’s value. Though this process may cause discomfort for holders, in the long run it is beneficial—it promotes more transparent and regulated companies, and helps investors price assets more rationally.

Third: Shorting increases market participation
A market limited to only long positions offers limited profit opportunities, reducing participation. If both rising and falling markets can be profitable, investor enthusiasm increases, trading volume rises, and market liquidity improves. This is good news for all participants.

How to short stocks via margin trading?

The most common way is stock margin trading (margin account). The process is:

1. Open a margin account — apply through your broker, usually requiring minimum funds (e.g., $2000)
2. Select the stock to short — choose the stock you expect to decline
3. Borrow the stock from the broker — the broker assesses your account to determine how much can be borrowed
4. Sell at current price — proceeds temporarily enter your account
5. Wait for the price to fall — patiently wait for your predicted decline
6. Buy back at lower price and return the stock — profit from the difference, paying interest

This method is straightforward and transparent, but requires significant initial capital and involves paying interest.

Practical example: How to short Tesla and earn $220?

Let’s look at a real trading case to deepen your understanding of the entire shorting process.

In November 2021, Tesla’s stock soared to a historic high of $1243. Then it started to decline, with technical signals indicating it would struggle to break previous highs.

On January 4, 2022, an investor judged that Tesla’s stock would continue to fall, and did the following:

• January 4: Borrowed 1 share of Tesla and sold it at around $1200
• January 11: When the stock dropped to about $980, bought back 1 share and returned it
• Net profit: $1200 - $980 = $220 (excluding interest and fees)

This was a complete short trade cycle. From opening to closing in just 7 days, the investor earned over 18%.

What about shorting forex currency pairs?

The logic is similar to stocks, but with an added concept of “relative depreciation.”

In forex trading, you’re always trading a pair (e.g., GBP/USD). Shorting GBP/USD means: you expect the pound to depreciate against the dollar, so you sell pounds first and buy them back later at a lower price.

This expectation is often based on:

• The Bank of England cutting interest rates (pound weakens)
• The US raising interest rates (dollar strengthens)
• Deteriorating UK economic data
• Rising geopolitical risks

In practice, you might do: Use $50 margin with 200x leverage to sell 1 lot of GBP/USD at 1.18039. When the exchange rate drops 21 pips to 1.17796, your profit reaches $219, with a return of 37%.

This demonstrates the power of forex shorting—using less capital to leverage larger gains. But the risk is also higher, as leverage is a double-edged sword.

Do you understand the real risks of shorting?

After discussing profits, it’s crucial to address risks. Many people get burned because they underestimate the dangers.

Risk 1: Forced liquidation
Your shorted assets are borrowed from the broker; ownership remains with the broker. If the market surges and your margin becomes insufficient, the broker can forcibly close your position. You might be forced out at the worst prices, suffering heavy losses.

Risk 2: Unlimited potential losses
This is the most terrifying aspect of shorting. Going long, the maximum loss is your initial capital (since stock price can’t go below zero). But shorting has theoretically unlimited losses—because stock prices can rise infinitely.

For example: you shorted a stock at $10, planning to buy back at $5. But if the price rises to $100, you lose $90. If it goes to $1000, your losses grow even more. This is why shorting is inherently riskier than going long.

Risk 3: High cost of misjudgment
If you expect a decline but the price rises instead, losses can escalate rapidly. Many short sellers, unwilling to accept losses, double down, making the situation worse.

Discipline for short traders

Given the high risks, how can you short safely?

First: Only short-term trading, not long-term
The biggest enemy of shorting is time. Brokers can recall borrowed securities at any moment, and you also pay interest. Long-term shorting is akin to gambling on time—highly unwise. The best approach is to quickly profit and close the position.

Second: Control your short position size
Don’t treat shorting as your main strategy; its best use is hedging your heavy holdings. Usually, short positions shouldn’t exceed 20-30% of your total capital.

Third: Never add to losing short positions
A common fatal mistake is to hold onto a losing short and add more to “average down.” This only increases losses. Remember: shorting requires flexibility, and stop-loss must be decisive.

Fourth: Set stop-loss and take-profit levels
Before entering each short trade, plan: where will I exit if wrong? Where will I take profit if right? Trading without a plan is gambling, not investing.

Summary: Is shorting right for you?

Shorting is indeed a powerful trading tool. Many successful investors accumulated huge wealth by skillfully shorting during bear markets. But it’s not suitable for everyone.

If you meet the following conditions, consider shorting:

• You have basic market analysis skills and can judge trends
• Your funds are sufficient to withstand significant volatility
• You have strict trading discipline and won’t be swayed by emotions
• You see shorting as a supplementary strategy, not your main approach

If not, it’s better to avoid shorting for now and gain experience through going long.

Remember: Shorting doesn’t mean betting on the market’s decline; it’s about making rational decisions based on thorough analysis and reasonable risk-reward ratios. Impatient shorting only leads to nightmares.