hey traders thanks for checking out this video my name is Travis from master the market
and in this one we're going to be talking all about short selling i'm going to break down
exactly how short selling works and i'll be giving you a short selling strategy that you can start
implementing into your trading even if you're brand new to trading and if you've never done
any short selling before so if you already know the basics and you know what short selling is
feel free to skip ahead to the strategy section of this video i'll have some time stamps for that
down below in the description but for everyone else let's start off with what is short selling
so short selling is going to be when a trader sells borrowed shares to buy back later
at a lower price for a profit okay so just like when you're doing a normal trade or investment
you still want to buy low and then sell those shares at a high price the difference with short
selling is that you're selling shares high first and then later on ideally the price
of the stock falls down and you're able to buy back those shares at a lower price for a profit
so to break this down step by step let's first say that you want to short sell stock
xyz because you believe for whatever reason that the price is going to fall
so when you place that order to short sell the stock automatically what that order is going to do
is request to borrow those shares from your broker so that you're able to sell them without ever
even owning them yourself and this is going to really depend on the availability of those shares
if there's a ton of other people that are also trying to short sell that same stock
at the same time you may not even be able to borrow those shares from your broker at all
however if you do and you're able to locate those shares your broker is going to loan them to you
for a small borrow fee once you pay that borrow fee you now have those shares that you're able
to short sell right before you think the price of the stock is going to fall okay so later on after
you've placed that order to short sale the next step is going to be to buy back those shares or
in other words cover your short position and once you do that those shares are automatically going
to be returned to your broker and you are either going to profit or lose the difference between
where you bought and where you sold so to help you visualize this process a little bit better let's
take a look at this diagram here that we see on the screen and let's just assume that the red dot
that we see here on the diagram is the price that we decide to short sell this stock and don't worry
just in a few minutes we're going to talk about the strategy behind when to short sell uh but
in this case after we open this short position uh the price of the stock does fall down we can see
there is a strong move down afterwards and we're able to buy back those shares at a lower price
again profiting the difference between where we bought and where we sold so this trade
that we see right now here on the diagram is actually the exact same trade that we see here
as far as profitability goes we're buying and selling at the same prices
the only difference is with short selling again we're just selling those shares first
and then later on buying them back at a lower price but the profit for both of these trades is
the exact same and just to reiterate in the stock market you always want to buy low and sell high
with short selling you're simply selling high first and then later on buying low for a profit
okay now as far as the strategy goes uh just like there are plenty of different strategies with any
other type of trading or investing for example when you're going long you can buy the dip you
can buy the breakout you can use different chart patterns and different candlestick formations
there's also a ton of different strategies for short selling you can short sell a stock that's in
a downtrend to kind of ride that downward momentum you can short sell a stock into a clear level of
resistance but the one that i want to talk about here in this video is going to be to short sell
into a stock's first lower high and really what this strategy does is looks to take advantage of a
stock changing from an uptrend into a downtrend so if we take a look here at this diagram we can see
that this is a stock that initially is starting off in an uptrend so we get our first higher high
on the chart here we could see that this is the first high or the first peak in general before
there is a small dip and then this is going to be our first higher high because it is of course
higher than the previous high then we get another higher high that forms and then finally we get our
first lower high which is of course lower than the previous high that first lower high is often
a great sign that the stock is changing from an uptrend into a downtrend and can be a really
great time to enter into a short position to take advantage of that bearish reversal
now over the past week we saw a really great example of this happen with the stock
s-o-n-m we're looking at the one-minute chart here for sonm and this actually happened to happen in
pre-market but this is something that happens time and time again all throughout the day with blue
chip stocks and even with penny stocks so what we see here is first sonm is starting off in a very
strong uptrend we can see the first higher high we get another higher high right here another higher
high and then another and then finally we get our first lower high which forms at about four dollars
and 40 cents so again that first lower high that forms is really going to be a great opportunity
to short sell and as you can see in this example here son m sells off from about four dollars and
forty cents at that first lower high point down to almost two dollars in 20 cents just a few hours
later so that was almost a 50 sell-off which means a potential for a profit of almost 50 percent
just from waiting for those higher highs to start turning into lower highs and the other really
great thing about this strategy is that every time you enter into it there's going to be a very clear
and defined level of risk so if you think about it if you're buying a stock at a level of support
the most common way that traders manage their risk with that type of trade is to cut losses
if the stock starts to break down below that level of support that same concept is going to apply to
short selling as well if you're short selling a stock into a level of resistance or below a level
of resistance because you would lose money as that stock goes higher when you are in a short position
you would want to cut losses if the stock started to break out above that level of resistance so
in this example here if sonm happened to continue to trade higher and start breaking out above this
previous high at that point there would be a good chance that overall this stock was still in an
uptrend and we would probably not want to have a short position open in this stock so you would
want to cut losses on that trade and just wait for a better time to get into a short position
and that actually brings me to a really important topic with short selling obviously managing risk
and keeping your losses small is very important with any type of trading or investing but a very
common disclaimer with short selling is that in theory it is a little bit riskier than other types
of trading or investing because if you think about it the worst case scenario when you buy a stock
is that that stock goes to zero dollars and zero cents and you lose 100 percent of your investment
however with short selling because you lose money as the stock goes up and there's really
no limit to how high that stock can go there's theoretically no limit to how much you stand
to lose when you have a short position open now i will say that for the most part your broker is not
going to let you lose more than 100 of what you have invested into that short position um so if
you have a 5 000 short position open in a stock once you get close to losing that entire 5 000
your broker is most likely going to call you and give you a margin call telling you to deposit more
money into your account and if you fail to do so they'll simply exit you out of that short position
for you but at the end of the day that's not a guarantee and you know there could be a big gap
up that happens overnight or the stock could spike up so fast that there is no time for a margin call
um so it is important to understand the risk of short selling and hopefully that kind of just
emphasizes how important it is to use a level of risk and cut losses when the time comes to do so
now additionally we of course already talked about how when you open a short position
you actually are borrowing those shares from your broker to sell them before you actually
own them yourself so i wanted to talk a little bit about different brokers for short selling
uh some of them are going to be better than others when it comes to locating shares short
and then some of them are actually not going to offer short selling to their clients at all so as
far as brokers go that i recommend avoiding in my experience robin hood td ameritrade and fidelity
are a few that are not going to be great options if you plan on doing some short selling
robin hood actually does not allow traders to short sell at all currently and brokers like
td ameritrade and fidelity again in my experience they're just not great for borrowing those shares
and more often than not if there's a stock that is spiking up that has a lot of attention on it
those are often the stocks that everyone is interested in short selling because after
they have that big spike they tend to crash back down and you can profit from that stock crashing
back down but i would say probably 90 percent of the time td ameritrade and fidelity and similar
brokers tend to not be able to locate those shares in order for you to borrow them to short sell
now on the other side of the spectrum uh brokers like trade zero interactive brokers
in e-trade all are known for being a little bit better options when it comes to short selling
they have a lot of different tools and features built into their platforms that kind of cater
specifically to short sellers and overall they are known to be better options
for borrowing shares to short so you're going to have better chances of being able to short sell
the stocks that you actually want to shorts out okay but anyway with all of that being said that's
going to be a wrap for this video hopefully you learned a thing or two about short selling and
enjoyed if you did please make sure to give the video a like and subscribe to the channel
so you don't miss out on future videos and if you want to learn step-by-step
more about day trading swing trading and even long-term investing i highly recommend you check
out our programs at master the market which are going to be linked down below in the description
but anyway thanks again for watching i hope you enjoyed and good luck with your trading
you