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Introduction to Market Shorting

The market offers an infinite number of opportunities to earn money. Shorting the market (short selling) is one of many options for creating a profitable trading experience. Short sellers go against the uptrend of the market by taking positions that profit when the market falls. Whether you like them or not, short sellers are necessary in the market. They act as the rational side of the market. Whether it is a declared or ranging bull market, the direction is not always straightforward. Short sellers bring that balance.

what is to shorten

Shorting involves the act of choosing a position that the market is speculated to correct. Short selling can be done using futures market rates, margins, and derivatives. This strategy is used by both technical and fundamental analysts. When a trader shorts futures, stocks, or tokens, the goal is to make a profit in a declining market.

This market position is often misunderstood by the public, especially when announced by the trader. In the eyes of the most enthusiastic and optimistic traders, a short seller often looks like an opponent. Many only speculate on the uptrend of the market, against the purpose of trading, making a profit. However, some short selling practices are manipulative. There have been some sharp rebuttals recently from buyers who believe that short selling is an unethical tool meant to keep a company’s stock price down for the sake of keeping it down. The recent case of the Gamestop stock market storm, a video game store, is still fresh.

Short Squeezing and Gamestop

The frenzy began when Reddit users in the “WalletStreetBets” reddit subgroups decided to go long on the shares of a struggling gaming company that had been very short in the past. These long positions resulted in heavy losses suffered by hedge fund traders and Wall Street, driving GME’s share price nearly 1000%. This is a classic example of a Short Squeeze. This refers to a rapid increase in price that will generally force short sellers to exit their selling positions or risk being liquidated. This event raised concerns about the activities of short sellers, whether such actions are an act of economic sabotage or simply commercial in nature. The irrationality of GME’s actions caused brokers like Robinhood to take over trading in the assets. In general, this is still a widely adopted aspect of the markets and shorting is not going anywhere.

How do short circuits work?

Shorting typically works with borrowed funds; however, the scope goes beyond simply borrowing a fund and waiting for the price to hit the expected target. For example, a trader who uses technical analysis to take a position might suspect a possible future price decline in his trading assets. If he decides to take his money out of the trade and simply hold fiat or stablecoins to buy back when the price falls, he has essentially taken a short position.

Also, you can decide to put down the collateral required to borrow a specific amount of that asset that you sell immediately. By doing this, when the price falls to your target, you can buy back and pay off your loan. This is the short selling process and many exchanges today are simply a one step process for the trader.

Whether as a margin, futures, or options trader, short sellers fall into the following categories.

Who are the short sellers?

coverages: Not to be confused with hedge fund, hedgers essentially choose a short position to hedge their risk. For example, a trader who takes a long position in the foreign exchange market may take a short sell position as a hedge against a sudden change in market direction. Similarly, when he retires a portion of his assets into stable assets, he is essentially hedging himself against future losses.

hedge fund: These guys act as the rational side of the market and typically cut into markets they consider to be overvalued. Your activities are necessary to maintain a balanced side in asset trading; without them, an asset can escalate to unprecedented levels based on sheer hype and hope.

day traders: Intraday traders can monitor their positions during various periods of the day. They can take a short position using shorter terms to cover their long position or take advantage of existing volatility.

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Importance of the short sale

Without short sellers, the price of an asset can rise to infinite levels creating bubbles that could cause serious damage to the economy. Short selling activity keeps the irrational side of the bull market sane. For example, if you had taken a Bitcoin sell position for $56,000 (at the time of writing), you would have acted in a purely rational state and made significant profits depending primarily on the leverage used. Short selling does not occur without some level of risk involved; It doesn’t come all rosy and profitable.

risks involved

Shorting in a raging bull market with a longer time frame will spell doom for your trading accounts. You risk significant losses when you trade this type of market without a set stop loss. The risk involved in taking a short position is enormous. It is recommended that only experienced traders with knowledge of technical analysis and risk management take up such a position.

Position sizing, leverage and proper risk management will significantly reduce shorting risks. Other than this, stay in the spot trade and use longer timeframes for entry and exit. Since an asset can rise indefinitely, shorting an asset has no limited downside, meaning a trader can lose it all very quickly.

concluding thoughts

Beginner in trading? Stay away from leveraged markets until you have mastered the art of trading using spot markets. Once you are comfortable, you can trade the derivatives markets on the spot market, which functions as a margin/futures market. Binance and the FTX exchange both have leveraged tokens listed. However, even with derivatives, your knowledge and experience are necessary to some extent. Leveraged tokens do not calculate gains or losses like other assets. Therefore, proper knowledge is essential.

Trading is fun and can be mastered for profit. There is no single approach to profitability; therefore, novice traders should not be pressured into adopting trading styles that do not suit their personalities. Short selling is also profitable, but it can wreak havoc on an uninformed trader’s account, causing loss of funds in unimaginable ways.

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