Shorting stocks or how to make money on uncovered trades
We are all accustomed to the fact that traditionally, making money on securities involves purchasing them and then selling them at a higher price.
But after the advent of contracts for difference (CFD Contract For Difference), it became possible to enter into unsecured sales transactions, including for securities.
Exchange trades for sale are often called short or short (short) trades, this allows you to immediately indicate the direction of the open position.
Shorting shares is when you sell securities without having them in stock, so to speak, borrow shares of a certain company from a broker, and an amount of collateral equal to the current value of the security is debited from your account.
In fact, the essence of CFD is much more complex, but there is no point in going into long explanations. What are CFD contracts - https://time-forex.com/interes/cfd-kontrakt
Why open short trades on stocks?
It would seem that what is the purpose of shorting shares, because purchase transactions are much more interesting. It’s nice to invest in a security hoping for its growth, and the accrual of dividends upon purchase is a useful bonus.
But in fact, today you can earn much more by shorting than by investing in securities. Gone are the days when company shares rose in price several times over the course of a year.
Currently, price collapses occur more often than price increases, and the size of the drop is usually greater than the price increase:
For example, some companies in the US stock market have fallen in value by more than 66%, meaning that a well-timed short trade could have yielded a profit of about 60%.
The second argument in favor of opening short trades is that it is much easier to track an event that will cause a market collapse than to predict an increase in the price of a certain asset.
Short shares should be started when negative financial reports are published, scandals appear, sanctions are imposed against the company, duties are increased, and other news that has a negative connotation.
Remember how a few years ago, shares of the Volkswagen automobile concern fell by 17% literally in a day as a result of a scandal involving manipulation during environmental tests.
Therefore, the more negative the news, the stronger the downtrend will be and the better the prospects for a short trade.
A Simple Strategy for Shorting Stocks
One of the simplest strategies when opening trades to sell securities is to use pending orders:
To implement it, you just need to determine the minimum price on the selected time frame for the desired asset and place a pending order below this minimum.
In this case, you should choose stocks that have not had major price declines over the past year and that are located close to support lines. This will increase the chances of a pending order being triggered.
When placing an order, do not forget about the stop loss and take profit , since after the order is triggered there is always a possibility of the uptrend resuming.
An alternative to placing pending orders when shorting shares is to install a signal indicator that will send you a message if the price breaks a significant low or breaks a support line.
Download the signal indicator – https://time-forex.com/indikators/price-alert
After this, you will check what caused the downtrend and if the news is strong enough, open a sell trade.
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