Short: Can you profit from falling prices?

What is Short Selling?

Short (, also known as “الشورت”), is a trading strategy that involves selling a certain asset first, and then buying it back later at a lower price. The idea is simple: you expect the price to drop, so you borrow the asset and sell it now, then wait for its price to decrease before buying it back and returning it to the lender.

This strategy is completely reversed from traditional buying. Instead of “buy low and sell high,” you do the opposite: “sell high and buy low.”

Short has been around since the seventeenth century in Dutch markets, but it became more famous during the 2008 financial crisis and the GameStop incident in 2021, when individual investors banded together against short sellers and drove the price up significantly.

The Risks That Await You

Before you think about this strategy, you should know: potential losses are theoretically unlimited.

When you buy stocks, the maximum possible loss is 100% ( if the price drops to zero ). But in Short, the price can rise infinitely, and the losses continue with it.

Imagine that you sold Bitcoin for $100,000 and then the price rose to $150,000. Now you've lost $50,000 and the price may still rise further. This is called selling pressure - when the price rises sharply and forces short sellers to buy quickly to cover their losses, which drives the price up even more.

Other risks:

• Borrowing Costs: Daily interest is paid on borrowed funds, especially for high-demand assets.
• Forced liquidation: If your funds fall below a certain threshold, the platform may forcibly close your position.
• Regulatory Restrictions: Authorities may prohibit Short selling during times of crisis.

What do you need before you start?

Short requires a special account that supports margin trading (margin trading).

Basic Requirements:

1. Initial Margin: Usually 50% of the value of the asset sold in stocks. In cryptocurrencies, it depends on the leverage. For example: if you use 5x leverage for a trade worth $1,000, you only need a margin of $200 .

2. Covering Margin Trades: The platform continuously monitors your funds. You must have sufficient funds to cover any losses.

3. Monitoring the Coverage Ratio: If the ratio drops sharply, you may receive a “margin call” - a request to deposit more or cover losses immediately.

How to Execute: Step by Step

Step 1: Secure the required collateral in your account. Step two: Borrow the asset from the platform ( Bitcoin, stocks, etc. ) Step three: Sell the borrowed asset immediately at the current price. Step four: Wait for the price to drop Step five: Buy the same amount at a lower price. Step six: You return the asset to the lender and keep the difference as profit.

Practical example: Bitcoin

Bitcoin is now trading around $87,660. You expect a drop soon.

You borrow 1 Bitcoin and sell it for $87,660 The price drops to $75,000 You buy 1 Bitcoin and return it to the lender. Your profit: $12,660 ( minus interest and fees )

But if the price rises to $100,000: Your loss: $12,340 plus fees

Another example: stocks

An investor believes that the stock of XYZ Company will drop from $50. He borrows 100 shares and sells them for $5,000. The price drops to $40, he buys them back for $4,000, making a profit of $1,000. But if it rises to $60, his loss is $1,000 plus fees.

Types of Short Selling

Type 1: Covered Short You borrow the asset before selling it - this is the legitimate and accepted form.

Type Two: Uncovered Short Selling Selling an asset you haven't borrowed yet - this is risky and illegal in many countries because it allows for market manipulation.

When do professionals use it?

Speculation: betting on a price decline to profit.

Hedging: Protecting your portfolio. For example: You own stocks and fear a price drop, so you open a Short position to offset potential losses.

Fraud detection: Short sellers sometimes help expose fraudulent or overvalued companies by selling them.

Improving liquidity: more sellers means more activity and ease in trading.

Potential Benefits

✓ Profit in bear markets ( instead of waiting for the rise ) ✓ Diversifying hedging strategies ✓ Contributing to market efficiency by revealing inflated prices ✓ Provides investment opportunities even in bad times

The controversy surrounding Short

Short is controversial. Governments and regulators are concerned:

• A rapid market decline may exacerbate.
• It may harm employees and shareholders.
• It may be used for market manipulation

Therefore, the authorities imposed regulations such as the uptick rule that limit consecutive short selling during rapid downturns and require disclosure of large trades.

Summary

Short selling is not for everyone. It is a powerful tool but has its pitfalls. It offers opportunities for profit even in bear markets, but potential losses are unlimited.

If you are thinking about Short:

• Understand the risks fully.
• Start with a small capital
• Use stop-loss orders
• Monitor news and events that may cause price jumps
• Do not ignore borrowing costs and fees

Ultimately, this is an advanced strategy that requires high expertise and discipline. Be cautious and learn well before risking your capital.