Going Short – How to trade a downward trend

What is Short Selling?

The term “Short Selling” originated in the stock market. A few years back, a person loaned stocks from his broker in order to sell them, and attempted to make a profit. Today the term “Going Short”, or just “shorting”, was adopted in the trading world, and it means selling an instrument. Respectively, buying an instrument is called “Going Long”, or just “Long”.

Advantages of Short Selling

Short selling has many advantages that attract many traders, new and experienced alike:

  • Short selling grants traders access to instruments that they would otherwise not be able to trade. If one wants to benefit from a decrease in an instrument’s value, he can do it without owning it.
  • Going short on an instrument, meaning opening a selling position on the platform, allows traders to benefit even when the markets are going down, as will be explained in the example later.
  • Short selling minimises the risk the trader takes. There is no need to buy and sell instruments in “real life”, rather trade them electronically and profit from the fluctuations. Moreover – should a person own crude oil, and its price drops dramatically and suddenly, the person is left with a merchandise that is worth less from the time he bought it, and without potential buyers.
  • In short selling one can monitor and control his investment with the use of different market orders, stop loss and others. These can prove critical when short selling.
  • Just like going long, one can employ leverage in short selling, and open positions larger than his capital.

Short Selling Example

Returning to this article’s favourite instrument – crude oil.

  • Say its price when the markets open on Monday is $44.50.
  • In regular trading, if a trader believes the price will rise, he will open a buying position, and if the price went up to $45.50, his profit is $1 for every unit sold.
  • With short selling the trader can act as the seller; if the expectation is for the price to drop, he would open a selling position for this instrument.
  • If the price got to $43.50, his profit is $1 and he can now close the position, meaning he “buys” the instrument for a better price.

Short Selling in Spread Betting

The same concept of short selling on regular trading, applies to spread betting. If one believes a certain instrument’s value will rise he can place £10, for example, for each pip the price moves. If, however, the instrument’s value is expected to decrease, he can place the same £10 for each point it goes down, and make the same profit.

Short Selling with AvaTrade

Short selling is a well-accepted trading method, and can be applied to all types of instruments – forex, commodities, stocks, bonds and others. Since it enables you to trade and benefit also when the markets are down, it is important to find a broker that has a well-established trading analysis, which will help you decide whether you should go long (buying) or short (selling). This, with a combination of over 250 instruments, that AvaTrade offers to its clients, provides countless trading opportunities and high profit potential.