Profiting from Short Squeeze When Trading CFDs

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When markets are going up, the conventional wisdom of ‘buy low and sell high’ can work out very well. If you buy shares in Company ‘ABC’ at $100 and then sell it at $150, that’s a tidy profit of $50, minus any commissions or interest. But, what happens when the market isn’t going up? What happens if the market is going down? This is where short selling comes into play.

If you bought Company ABC and its value went down to $50, you would lose money when you sold. Short selling makes it possible to profit on the stock market regardless of if it is increasing or decreasing in value. As long as the market keeps going in your direction, your short position will be making you money.

In this article, you will learn everything you need to know about short selling. What does it mean to short a stock, how short selling works, why you should consider short selling via CFDs, how to short a stock CFD, the best stocks to short, and the markets you can trade short positions on!

What is Short Selling?

Short selling is taking a bearish, or negative, trade on an asset. Rather than buying low and selling high, you sell high and buy low, and make a profit on the change in the asset’s price.

Let’s continue with the previous short selling example of stocks in Company ABC. If you believed it was going to go down, instead of opening a ‘buy’ trade, you would open a ‘sell’ trade. You open the trade at $100 and the price of Company ABC falls to $50. You would then make a profit of $50 – the difference between the opening and closing price of the stock.

Before we look at some of the reasons why you would consider shorting a stock, or any other asset class, let’s first understand how short selling works, and how you can make your first short trade.

How Does Short Selling Work?

One of the biggest questions new traders have when considering short selling is, how can you sell something you don’t own?

For a traditional short sale, a trader would begin by borrowing the shares of a stock that they do not own (usually from their broker’s account). They would then sell these shares on the open market at the lower market price.

The goal of the short seller is to later re-purchase those shares at a lower price, and return borrowed shares. They would then pocket the difference between the initial sale price of the stock and the cost of buying them back.

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Mathematical Formula of a Short Sale

The mathematical formula of short selling is relatively simple. By default, online brokers always show net gains or losses on trading platforms.The lower the repurchase price of your shares relative to your selling price, the more money is earned. In other words, the lower the price of the stock sold short, the more likely you are to make significant gains.

(Sell Price – Purchase Price) x Number of assets – Transaction Cost = Profit

Here’s the breakdown of each part of the formula

  • Sell Price = Price at which the trader sells the financial securities
  • Purchase price = Price at which the trader redeems the sold securities
  • Number of assets = Number of assets sold by the trader
  • Transaction cost = Broker’s commission

If the result of this formula is:

  1. Positive: the trader realised a net gain
  2. Negative: the trader realised a net loss.

An Example Of Short Selling

Let’s assume that a trader took a short position of 100 shares of Company ABC, at a price of $20 per share. After a period of time, the stock declines to $10, and the trader then decides to re-purchase the shares. The profit on the trade would be $1,000, minus any commissions and interest.

($20 – $10) x 100 = $1,000

However, what would happen if the stock went up after the trader took on their short position? Let’s say that Company ABC spiked to $50 per share and the trader decided to cut their losses. In this case, their loss would be $3,000 [($50 – $10) x 100], on top of any commission and interest that they had to pay for the position.

As you can see here, the losses are greater than 100% of the invested capital, with the initial investment being $2,000 ($20 x 100 shares), and the loss being $3,000. This is the major risk of short selling – an infinite loss. Since there is no upper limit to a stocks’ price, the short seller’s maximum loss is theoretically infinite.

However, there are products available that can help short sellers to minimise risk. For example, did you know that it’s possible to practice your short selling strategy, without putting any of your capital at risk? That’s right. With an Admiral Markets risk-free demo trading account, professional traders can test their strategies and perfect them without risking their money.

Why Should You Consider Short Selling Via CFDs?

A CFD (or Contract for Difference), allows traders to speculate on the rise and fall of a market, without owning the underlying asset. Essentially, a CFD is a contract between two parties – the trader and the broker. At the end of the contract, the two parties exchange the difference between the price of the stock at the time they entered into the contract, and the price of the stock at the end.

Rather than having to invest in stocks traditionally, the trader is paying the difference between the opening and closing price of the stock, or instrument they are trading. The simplicity of entering and exiting positions, compared to other trading vehicles, is just one reason why short selling stock CFDs is very popular. That’s not to say it’s easy, of course, but there are some benefits, such as:

  • Leverage – a retail trader can trade positions five times their balance. A professional trader can trade positions twenty times their balance.
  • Trade in any direction – Go long or short on any stock. No extra charges on short sales.
  • Advanced risk management tools – use stop loss orders and take profit levels to minimise risk.
  • Access global stock markets – trade US Share CFDs, EU Share CFDs, UK Share CFDs

Having the right products at your fingertips is hugely important to traders involved in global markets. With Admiral Markets, there are several different options available when it comes to investing and trading with Stocks, ETFs, Share CFDs etc. For example, Invest.MT5 enables traders to buy and own stocks. Trade.MT4, Zero.MT4, and Trade.MT5 enable professional traders to trade with currencies, cryptocurrency CFDs, Stock CFDs, Bond CFDs, and much more!

If you would like to explore each option in detail, make sure to read about Admiral Markets’ account types, where you can explore a detailed breakdown of all the trading instruments available for each account, the leverage available, and more. Put simply, with an Admiral Markets CFD trading account, you can speculate on rising and falling prices. This offers traders unique flexibility when trading the financial markets.

Ready to make your first short trade? You can start trading today here.

How Do You Short a Stock CFD?

Thanks to virtual trading software, short selling a market has never been more simple. The key is in owning the right platform. For example, the MetaTrader Supreme Edition plugin for MetaTrader 5 enables you to trade across US, EU, and UK Share CFDs with advanced platform features.

Source: Admiral Markets Supreme Edition MT5 – #AAPL, Weekly Chart – Data Range: October 2, 2020 to January 24, 2020 – Taken on January 24, 2020. Please note that past performance is not a reliable indicator of future results.

The chart above displays Apple stock. The MT5 Supreme Edition platform enables traders to view historical price data of stock prices, as well as the ability to use a whole range of free trading indicators, to aid with making trading decisions. This version also has the ‘Mini Terminal’ feature which allows you to choose the parameters of your trade.

To take a look at how simple it is to trade on the MetaTrader platform, simply click the banner below to start your FREE download!

To place a short order one would simply click the ‘Sell’ button, where you can also add a stop loss and a take profit level. These orders help traders to get out of their positions at predefined price levels, either at a loss or in profit.

How to Short Sell on MT5

  1. Create a demo or live trading account with Admiral Markets.
  2. Download and install MetaTrader 5 for free.
  3. Open MetaTrader 5 and sign in using your demo or live account details.
  4. In the ‘Market Watch’ window, double click the asset you would like to short sell.
  5. Add the volume and an optional stop loss and take profit, and then click ‘Sell by Market’,

Prefer trading in MetaTrader 4? Good news – the process is the same! If you’re new to the MetaTrader trading platform, you can see how they work in this video:

How to Short a Stock in MetaTrader Supreme Edition

  1. Log in to your trading account
  2. In the ‘Navigator’ window, expand ‘Expert Advisors’ and select ‘Admiral – Mini Terminal’.
  3. Drag ‘Admiral – Mini Terminal’ to the chart of the instrument you’d like to trade.
  4. Add the volume of your trade, and optional trailing stop, stop loss and take profit.
  5. Then click ‘Sell’.

Source: AC CFD, Chart M5, MetaTrader 5 Supreme Edition Admiral Markets, November 26, 2020

Before trading, though, it could prove to be useful to have some idea of which stocks are suitable for shorting opportunities, so let’s take a look:

When is the Best Time to Short?

Unfortunately, no one can predict the future. However, there are certain scenarios where short selling stocks may prove to be useful, here are three scenarios where short selling stocks might potentially be a good move:

#1. A financial crash happens

Remember the 2008 financial crash? What about the 2000 tech bubble? Crashes do happen, albeit not that often. However, it’s all about being prepared, so if it does happen, you know what to do.

#2. A company scandal

This scenario happens more frequently than financial crashes. Remember Volkswagen’s diesel emission scandal in 2020?

Source: Admiral Markets MT5 Supreme Edition – #VOW, Monthly Chart – Data Range: May 1, 2020 to January 24, 2020 – Taken on January 24, 2020. Please note that past performance is not an indicator reliable of future results.

The box highlighted in yellow displays monthly bars of the drop in Volkswagen’s stock price during the diesel emission scandal. The move down wiped out three years worth of rising prices. Having the right platform and product to be short the market could have proved useful in this particular instance, depending on your strategy.

#3. An earnings miss

Every quarter, public companies release their earnings report. Analysts give out their estimates on what they think the numbers of earnings per share and revenues, amongst others, will be. If the company misses these estimates, it causes some traders to dump their stock and some to initiate new short positions. After a series of bad earnings reports, the company could start to exhibit features of a down trend.

Source: Admiral Markets MT5 Supreme Edition – #AA, Weekly Chart- Data Range: January 1, 2020 to January 24, 2020 – Conducted January 24, 2020. Please note that past performance is not an indicator reliable of future results.’

The screenshot above is a chart of Alcoa, the world’s sixth largest producer of aluminium. After enjoying a rising price for much of 2020, mid 2020 marked the point where the stock started to fall. Having the flexibility to participate in the upside and downside puts traders in unique positions of market activity. Sometimes a trader wants to participate in shorting the market, rather than an individual stock. This is another benefit of short selling with CFDs.

What Markets can you Trade a Short Position On?

With Admiral Markets you can participate in short selling, or taking a bearish approach on multiple assets. So what other assets can you take a short position on? Here are some examples:

  • Forex
  • Commodity CFDs
  • Index CFDs
  • Bond CFDs
  • Share CFDs

Below is a list of the best-selling US stocks traded with Admiral Markets, during the month of September 2020:

  • Disney: 47,44%
  • Apple: 14,37%
  • Netflix: 10,49%
  • Facebook: 10,29%
  • Tesla: 5,27%
  • Alibaba: 4,06%
  • Twitter: 2,81%
  • Microsoft: 1,85%
  • Amazon: 1,51%
  • Deutsche Bank: 1,46%

The Short Squeeze: Another Short Selling Method

A squeeze on the stock market occurs when stock prices drop sharply and quickly following an adverse announcement. Graphically, it often occurs after the break down of a support or a reversal figure as a sell signal.

Savvy investors then take advantage of this decline by buying the stock at a lower price en masse.

The prices then rapidly bounce back, which traps traders with losses. This effect is exacerbated by the liquidity and the influx of purchase orders without selling traders, since everyone is looking to buy.

Volkswagen: The Biggest Squeeze Short of all Time

In 2008, the automobile sector suffered a large blow because of the indirect effects of the subprime crisis. Hedge funds and speculators were targeting downward-moving stocks in the sector, and Volkswagen was an ideal mark for this trend.

Source: Admiral Markets MT5 Supreme Edition – #VOW, daily chart. Data Range: July 8, 2008 to April 21, 2009 – Conducted on January 24, 2020. Please note that past performance is not a reliable indicator of future results.

From October 17 to 24, 2008, Volkswagen shares dropped by more than 50%. Over the next two trading days (October 27 and 28, 2008), they suddenly rose from €200 to €1000, an exponential increase of over 400%!

This spectacular rebound is explained by the strengthening of Porsche within the capital of Volkswagen from 35 to 42.6%, and the holding of call options up to 31.5%. Thus, Porsche’s participation amounted to 74.1%. The German regional state, Lower Saxony, preferring to keep its titles, remained at only 6% of the available float on the market.

When speculators heard this news and saw the bearish scenario turn to their disadvantage, they rushed to buy to limit their losses. But since there were so few shares on the market, this caused the biggest short squeeze in history.

Without neglecting the emotional impact on short sellers, this was a temporary phenomenon that lasted just a few days. Very often, it does not create a significant consequence on the underlying market trend.

In just a few clicks, you can start trading stocks with an Admiral Markets account! Click the banner below to get started.

Short Selling Strategies

Short trading strategies are by nature speculative in the short and medium term.The maximum profit available to short sellers is the equivalent of the price of the asset at the time the trade is opened.

In order to achieve this profit, it’s important to follow a strategy. Below we’ll share a short selling strategy for the DAX30 CFD, as well as how you can use technical analysis for successfully short selling stocks and other instruments.

Short Selling Strategy on the DAX30 CFD

Source: DAX30 CFD, Chart M5, MT5 Admiral Markets, November 26, 2020

A basic short selling trading strategy for the DAX 30 CFD is to begin by following the economic calendar and the ZEW market sentiment indicator.

The German index generally reacts favorably to the publication of the ZEW index. If the published value of the ZEW is lower than the value projected by market analysts, you can anticipate a decline in DAX30 prices and begin short trading.

Short Selling with Technical Analysis

One of the most common short selling strategies used in technical analysis is to open a trade after the confirmation of a bearish breakout on an uptrend line.

The second strategy of short selling is to identify a downward flip figure such as a shoulder-head shoulder, an ascending bevel or a double-top. To increase your chances of winning, you can combine bearish breakout on the bullish line with the flipping figure.

A third short selling strategy is to play price differentials with moving averages. For example, you use the 50- and 200-day moving averages (MM50 and MM200).

  • If MM200> MM50, the bias is bearish, the MM200 plays the role of resistance. A short stance on the MM200 approach would be an opportunity to bet on a deeper decline in financial assets.
  • If MM50> MM200, the bias is bullish, the MM200 plays the role of support. A short position at the break down of the MM50 would be an opportunity to target a goal on the MM200 without questioning the bullish bias.

Source: Admiral Markets MT5 Supreme Edition – #USDJPY, hourly chart. Data Range: December 17, 2020 to January 24, 2020 – Conducted on January 24, 2020. Please note that past performance is not a reliable indicator of future results.

How to Protect Yourself from Short Selling Risks

Short selling can be risky, but there are three simple ways to protect yourself against the potential setbacks:

  1. Put a Stop Loss on sell orders
  2. Use volatility protection tools
  3. Choose a broker with negative balance protection

Using a stop loss is the easiest way to protect yourself. It allows you to define in advance the maximum risk of losses that you can tolerate on your short position. It is a useful tool that should be used habitually, protecting also against the risks of slippage and stock market gaps.

You can see how to set a stop loss and take profit in MetaTrader 5 in the following video:

Another method to mitigate the risks of slippage and excessive volatility is to take advantage of the volatility protection tools that Admiral Markets offers. The most significant of these is the execution of stop and market orders as limit orders with predefined maximum slippage. This gives traders the possibility to to enter the market with a limited risk and potentially unlimited additional gains. Predefine the maximum acceptable slippage from 1 to 1000 points per account in the Account Settings page of the Admiral Markets Trader`s Room. When a stop order is triggered or a market order is requested, a limit order is placed instead at the price that is less favourable by a predefined amount of points. A limit order like this is placed under the terms when it is immediately triggered, so it can be only executed with positive or zero slippage or otherwise just cancelled. Therefore, the maximum slippage of the original stop or market order is limited to a predefined amount of points, while the positive slippage of the resulting limit order can be unlimited.

To further protect its customers, Admiral Markets also offers a Negative Balance Protection Policy. If your account somehow lands in the negative, it will be automatically reset to €0. You will not risk losing more than your initial capital. To learn more about Admiral Markets’ negative balance protection policy, click the banner below!

Short Selling and Dividends

Sellers can not withdraw dividends on securities they hold positions on.

It’s not exactly a risk, it’s a logical consequence. During a stock short sale, the seller does not benefit from the distribution of dividends simply because they do not own the shares, they are being lent to their broker. Dividends are cashed by the lender, who is the true owner of the stock.

Why Short Selling Can be Restricted

It can happen that a certain market or regulatory body might halt the ability to short sell a given stock or stocks. Restrictions on short selling in general are made to protect companies and prevent abuses by unscrupulous speculators. There are many reasons why short selling can be restricted, but the primary reason it occurs is due to economic reasons and factors.

Restriction of Over-the-Counter Sales for Economic Reasons

When too many speculators simultaneously short a stock, a company’s stock price may collapse. Investors seeking long-term investments may become suspicious of the stock, and may also decide to sell their stock, which accentuates the bearish spiral of the stock in question.

This snowball effect can collapse the stock market valuation of a company.

For the company concerned there are real interests at stake: it can be denied loans to finance its cashflow, its suppliers may deny it payment facilities for fear of not being paid.

The risk is that companies that are economically viable and that provide jobs will go bankrupt or experience great difficulty without any justification. It is only because their stock has attracted the attention of too many short sellers simultaneously.

Short Selling Protection Rules for Financial Authorities

In order to mitigate the risks that short selling imposes on companies, the financial market authorities have adopted strict rules.

The main protection against short selling speculators are the brokers and financial intermediaries who carry out the transaction between the trader, who borrow the securities, and the lender, who lends his securities to the trader. Regulators will require brokers to own a percentage of the loaned securities.

For example, if a trader wishes to sell 100 Total SA shares, the SEC may require the broker acting as an intermediary to hold at least 70% of the shares, (i.e. 70 Total SA shares).

The second rule of protection used by regulators is the obligation to publish short selling positions held in the portfolio. Once you sell more than a certain percentage of a company’s shares, you must notify the regulator and make your position public. In France, the AMF sets this threshold at 0.5% of the capital of a company, while the US’ SEC doesn’t have any such restrictions.

How Short Selling Can Bring Balance to Stock Markets

There are a number of arguments in favour of short selling, when it comes to the health of the markets. These are:

  • Short selling naturally regulates stock markets
  • Short selling brings liquidity to financial markets
  • Starters launching alerts to detect fraud

Proponents of short selling highlight its role as a natural market regulator. When markets experience long periods of uninterrupted rises, this leads to imbalances, and assets are artificially overvalued. Short selling is a natural way of reducing assets to their true value as speculators weigh down on the price of an asset.

The perfect illustration of this self-regulating mechanism is the will of the Chinese government to expand short selling in its market, where many stocks are overvalued because of a lack of transparency and communication. The overvaluation of companies is just as harmful for both itself and their shareholders in the long run as undervaluation.

Short selling also provides liquidity in naturally illiquid markets. Liquidity is essential to attract investors, it guarantees them to be able to resell their title at the desired moment. Historically, short selling is more effective than any tool available to regulators today to attract liquidity to a market.

Since short selling carries significant risks, traders use it only after a thorough analysis of a company. They do not just analyse the financial figures. After detecting anomalies in the conduct of a business or financial figures, the traders are positioned massively for sale. These financial positions push the regulators and public authorities to be interested in sellers but also in the company under attack. Thus, the existence of fraud with disastrous consequences in the long term can be updated and stopped thanks to the short sale.

One example of this occurring is Herbalife, a pharmaceutical company whose products contained up to 10 times the maximum permissible lead content, with serious health consequences for consumers. The authorities weren’t interested in thoroughly investigating the company following complaints from consumers, but after several hedge funds got wind of the fact and pushed the value massively downward on the market, the authorities deepened their investigation and uncovered massive internal fraud.

Short Selling Explained: Conclusion

Short selling an asset means to take a bearish view on its price. In this instance, the trader believes that prices will fall. Maybe they are considering shorting the market because of a potential financial crash. Or, perhaps they are shorting stocks due to an earnings miss, or maybe it’s a simple down trend scenario.

The traditional method of short selling stocks is to borrow the stock, and then sell it on the open market, buying it back when the prices fall. However, there are now simpler products, like Share CFDs, that allows traders to speculate on prices rising or falling without any ownership.

Platforms like MetaTrader 5 and add-ons like the MetaTrader 5 Supreme Edition plugin can help traders in their decision making process, by providing advanced trading features. In addition, with a demo trading account, you can practice taking a short position on multiple asset classes such as Share CFDs, Forex, Index CFDs, Commodity CFDs and Bond CFDs. If you are considering learning the art of short selling, trading in a risk-free environment can help you hone your trading skills, and inhibit you from putting your capital at risk, until you are ready to do so.

To get started with your trading experience, click the banner below and download MetaTrader 5 for FREE!

About Admiral Markets
Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world’s most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

What is short-selling and how does it work?

Short-selling goes against the traditional mantra of buying low and selling high. But it can be a useful tool, helping traders to find opportunity even in falling markets. Find out what short-selling means and how it works.

What is short-selling?

Short-selling, also known as ‘shorting’ or ‘going short’, is a trading strategy used to take advantage of markets that are falling in price. The traditional way to short-sell involves selling a borrowed asset in the hope that its price will go down and buying it back later for a profit.

Borrowing the asset comes at a cost, which is normally a small percentage of the asset’s price.

Short-selling can also be done via CFD trading or spread betting. Both are derivatives, which enable you to speculate on the price movements of the underlying asset without taking ownership of it.

Most short-selling takes place on shares, but you can short-sell many other financial markets, including forex, commodities, indices and cryptocurrencies, where it has become popular to short bitcoin.

What makes short-selling different is that you would take the position only if you have a negative outlook on the asset’s performance. You most likely believe that there is no potential for price growth, and you think the market is entering a downswing. If you didn’t, you would take a long position. Then there’s hedging; short-selling can also help you to hedge against potential downward movements in markets you have a long position in. Read on to find out how you can hedge your long positions with short-selling.

How to start shorting

To start shorting using derivatives, follow these simple steps:

  1. Open an IG trading account: it only takes a few minutes to open an account. You can even do it on your smartphone
  2. Find an opportunity: we offer various tools including the IG market screener, to help you find what you’re looking for
  3. Place your trade: when you’re ready to trade, open your first position by selecting the market you want to short and choosing ‘sell’ on the deal ticket

Ready to start short-selling? Open an account with IG.

How does short-selling work?

Short-selling works in two different ways, depending on how you want to trade. Traditional short-selling involves borrowing the underlying asset from a trading broker, immediately selling it at the current market price, and then buying it back at a later date to return to the lender. If the market does fall, you can profit from the decline, but if it rises, you’ll have to buy back the asset at a higher price and accept the loss. An alternative way to short-sell is to speculate on price movements with derivatives such as CFDs and spread bets.

Traditional short-selling comes with a few limitations. For instance, because you don’t own the assets that you are going to trade, you’ll need someone to lend them to you. This means that you could encounter issues like an unborrowable stock – the term for an asset that no one is willing to lend you. The second method – using derivatives products such as CFDs and spread bets – does not require the exchange of an underlying asset.

With CFD trading, you are agreeing to exchange the difference in price of your chosen asset from when the position is opened to when it is closed. When you short-sell a CFD, you open a position to ‘sell’ the asset. For example, if Apple shares are trading at $150 a share, and you short-sell 100, you could close your position when the price reaches $145 a share and make a profit of $500 (($150 – $145) x 100).

And with spread betting, you are placing a bet on the direction of the market price (by going short if you think it will fall). You choose a certain currency value per point when you open your position, which will determine your profit. For example, if you go short on Apple shares at $5 per point, you will earn $5 for every point that the stock moves down.

You can practise your trades on a demo account or open a live trading account if you’re ready to take on the markets.

Which markets can I short-sell?

You can short-sell a variety of markets, depending on your interests, knowledge and appetite for risk. Click on the market below to learn more.

Example of short-selling

Suppose bitcoin is currently trading at $10,100, but you think the price will go down. So, you decide to open a short CFD position on 10 bitcoin. A week later, the price reaches $10,000 and you close your position. This means you have made $1000 in profit (opening position price less the new asset price, multiplied by the number of bitcoin traded via CFDs).

If the price rises, you will run a loss. For example, if bitcoin rises to $10,150, you will lose $500.

Why short-sell?

The main benefit of short-selling is that it increases the number of trading opportunities. The two most popular reasons for short-selling are speculation and hedging.

Short-selling to make a profit

Short-selling gives traders a whole new dimension of market movements to speculate on – as traders can make money even if the underlying asset drops in price. If many people are short-selling a specific stock, it could mean that the company is in trouble. On the other hand, short sellers are often blamed for causing or aggravating a downswing to make more profit. Evidence suggests that if companies take defensive measures against short sellers, it is likely that the firm’s returns may be lower than expected.

Short-selling to hedge open positions

Hedging is another way to use short-selling. This is the practice of holding two positions at the same time to offset losses from one position with gains from another. With hedging, traders with a short position can protect against losses on a long position. For example, if the stock is at a risk of a decline, you could use a short derivative position to offset the risk. While hedging your positions may not necessarily prevent a loss, it can lessen the impact.

But short selling also has its disadvantages. There is higher exposure to losses if the asset’s price doesn’t behave as you expect. If an asset’s price increases, your losses could potentially be unlimited. And if this happens, a short squeeze can occur, which means short sellers all try to cover their positions at once – pushing the price of the stock up even further and amplifying losses. This makes it important to have a risk management strategy in place.

Why are short-sellers viewed with suspicion?

Short sellers are often blamed for causing or aggravating a downswing in the market to make more profit. They have been said to deliberately decrease the value of a stock, pressuring other traders to go short, further impacting the share price. However, this is a misconception – as short selling has little or no effect on the share price if it is already dwindling.

A recent example of this is the battle between short sellers and management on Tesla stock (TSLA). Elon Musk, Tesla’s CEO, has frequently criticised short-sellers, labelling them ‘value destroyers’ and suggesting that short-selling should be made illegal.

Another factor causing short-sellers to be viewed with suspicion is the ban on short-selling during times of economic distress. During the 2007 financial crisis, regulators in the US, UK, Germany and Japan restricted short-selling. They do this when they try to protect falling markets, which leads to short-sellers being perceived in a negative light because their activities are banned.

Why short-selling is important for efficient markets

Short-selling is important for efficient markets because it helps to ensure they are priced correctly through price discovery. This can include forex markets, stock markets, and all other financial markets.

Shorting stocks helps increase market liquidity, as thousands of people are short-selling shares on any given trading day. This means that it is much easier for a buyer to trade the asset because there is a constant supply. Studies have shown that restrictions on short-selling lead to lower trading volumes, making short-selling integral to financial markets. Liquidity from short-selling also leads to a significant narrowing of spreads, which ultimately results in reduced costs for investors. A study of the 2008 financial crisis showed that the spread on stocks with a short ban increased by 150% more than on stocks without such restrictions.

Another benefit that short-sellers bring to financial markets is an intense scrutiny of a company’s financial statements, operating model and future prospects. The uncovering of any sensitive information is highly beneficial as it allows investors to better assess their investment decisions.

Short-selling tips

In order to get the most out of the market via short-selling, it’s important that you do extensive planning and have a solid strategy. We’ve put together a few tips to get you started.

  • Do a complete fundamental analysis on the market before you decide to go short
  • Consider the company’s business model before you short stocks – is it still relevant or are competitors overtaking them?
  • Keep an eye on management structure and accounting irregularities. A company that changes its management often and engages in aggressive earnings management may be struggling
  • Be mindful of your position size – the larger it is, the more risk is involved. However, if the position is very small, you might not make a visible profit
  • Set up trading alerts that will notify you when your market hits a certain level and then lets you decide what to do next
  • Place trailing stops that will follow your position if it earns a profit and close if it reverses
  • Place guaranteed stops to close your position once it rises to a certain point. This puts a limit to your downside and you’ll only have to pay a small charge if your stop is triggered

Short-selling summed up

We’ve summarised a few key points to remember on short-selling below.

  • You can go short on markets of your choice, including shares, indices, commodities, forex and cryptocurrencies
  • With IG, you can go short in your chosen market via CFD trading or spread betting
  • If the underlying market price dips, you could make a profit. If the market price rises instead, you will make a loss
  • It’s important to have the appropriate risk management tools in place to avoid big losses
  • You can open an IG trading account in just a few minutes and start shorting today

In a nutshell, you can use short-selling to speculate on falling market prices – giving you the opportunity to profit from bear markets as well as bull runs.

Понятие Short Squeeze на примере рынка криптовалют

Порочный круг для медведей именуется «шорт сквиз» (от англ. «short squeeze») – короткое сжатие. Чтобы не оказаться в ловушке, участник рынка должен понимать принцип работы коротких позиций, видеть потенциальный «шорт сквиз». Опытные трейдеры знают, как получить прибыль при коротком сжатии.

Когда цена акции или валюты начинает резко расти, трейдеры, играющие на понижение, попадают в ловушку. Они срочно выкупают рыночный актив для закрытия коротких позиций, чтобы минимизировать потери. Это провоцирует еще больший рост цен. Шортовые спекулянты, оставшиеся в незакрытых позициях, несут огромные убытки, так как цена продолжает увеличиваться.

Определение и разбор примеров

Приемом рыночной манипуляции «шорт-сквиз» часто пользуются крупные инвесторы. Они выкупают перепроданный криптоактив, стимулируя сильное увеличение его стоимости. После чего обычно следует спад рыночной цены до прежних значений. Преднамеренное создание таких ситуаций на обычных фондовых биржах приводит к уголовной ответственности, но не в криптовалютной отрасли.

Криптовалютный рынок только начал входить в стадию «зрелости», поэтому подвержен манипуляциям. Влияние отдельных участников торгов имеет большую силу. На новости, экономические и политические события крипторынок реагирует, но не так явно. Существует привязка к динамике биткоина, поэтому события на рынке сложно прогнозировать по фундаментальным факторам.

По мере развития криптовалютной торговли прибавилось количество «коротышей» или трейдеров, пользующихся на «медвежьем» рынке короткими позициями. Увеличение таких сделок создает угрозу «short squeeze». Позиции «шорт» в торговле BTC ставят рекорды. Многие эксперты в области трейдинга советуют воздерживаться от торговли, если не сформирован устойчивый тренд.

Шорт сквиз биткоина 02.04.2020

2 апреля bitcoin пробил важный уровень сопротивления – $4 200. На основных торговых площадках произошел short squeeze, что усилило восходящее движение главной криптовалюты до $4 849. Изменились технические индикаторы. Вслед за BTC на 6% подорожали Ethereum и XRP. Объемы торгов выросли на 50% и увеличились до 48 миллиардов.

За несколько часов стоимость биткоина возросла на 15%, затем он откатился до $4 652.

Апрельский шорт-сквиз на годовом графике BTC выглядит следующим образом:

Итак, прорывом $4 200 завершился тренд на понижение, длившийся 16 месяцев. Шорт-сквиз на биржах подстегнул дальнейшее увеличение цен BTC. Эксперты называли разные причины скачка, среди них:

  • позитивные новости, которые стимулировали инвесторов;
  • крупные вливания от азиатских фондов вблизи значимого уровня цен, покупки стимулировали выход из коротких позиций.

Резкий рост биткоина 14.05.2020

Ночью 14 мая главная криптомонета выросла за сутки на 17%, пробив отметку в $8 213 впервые с августа 2020. Альтернативные валюты также подорожали: Ethereum на 13%, XRP – 22%, Bitcoin Cash на 15%.

Эксперты по BTC объясняли майские колебания следующими причинами:

  • действия спекулянтов, например, большие игроки за 2 часа 12 мая провели сделки с биткоином на сумму около 100 миллионов;
  • лоббирование выступлений политиков США против криптовалюты в целях поддержания стоимости;
  • новый виток американско-китайской торговой войны подогрел интерес инвесторов к крипте.

Рост стоимости bitcoin в период 14-15 мая можно увидеть на графике:

Специалист по крипте Алекс де Фриз связал резкое увеличение спроса с проблемами на торговой площадке Bitfinex. Прокуратура США подала судебный иск на биржу, финансовая отчетность которой не сошлась на 850 миллионов. Паника на Bitfinex спровоцировала массовый вывод средств через покупку биткоинов.

Завышенный спрос в сочетании с низкой ликвидностью BTC направил рынок в сторону увеличения. Одновременно с этим возник short squeeze, шортисты выходили из коротких позиций, выкупая криптомонету по завышенной цене. Bitfinex объявила, что закрыла дыру в отчетности с помощью биржевого предложения Алекс де Фризэкономист.

Выдавливание позиций в июне и июле 2020

Летом 2020 года цена биткоина сильно колеблется. Стремительные взлеты и снижения аналитики связывают с действиями крупных игроков и самих бирж. С помощью маневра «short squeeze» они вытеснили держателей коротких позиций в BTC.

Резкий пик взлета и падения цены наблюдался 26 июня 2020 года:

Известный специалист по криптовалюте и инвестор Билли Ву подчеркивает, что шорт-сквиз без настоящих инвесторов чрезвычайно выгоден. Выдавливание «шортистов» прекращается, когда большинство трейдеров переключаются на лонги.

Трейдинг во время short squeeze

В ближайшей перспективе ожидается не один short squeeze, так как криптовалютный рынок отличается высокой волатильностью. Профессиональные инвесторы рекомендуют в этот период дожидаться восстановления здоровых трендов на покупку, когда искусственный памп улетучивается, курсовая стоимость актива корректируется, возобновляются сделки на бычьем рынке.

Малоопытные «шортисты» оказываются в убытке из-за short squeeze, так как его сложно предсказать. Сам по себе высокий показатель коротких позиций не означает, что далее последует рост или снижение курса. Стоит обращать внимание на серьезное увеличение объема на графике, периоды сильного бычьего движения, закрытие позиций в шорте, появление фейков для загона медведей в ловушки.

Наработать опыт сделок в период шорт сквиз помогут следующие рекомендации:

  • применять внутридневные и краткосрочные стратегии;
  • подготовить список активов для входа в рынок в момент паники, использовать выдавливания как способ входа в тренд;
  • всегда следовать правилам риск-менеджмента;
  • принимать решения на основе живых графиков, например, TradingView.

Прогнозировать выдавливание шортов можно на основе внутридневных фигур или сетапов с построенными пробоями. Трейдер должен следить за формацией флага, использовать «треугольник», стохастический осциллятор и другие фигуры.

Для шорта криптовалюты подойдут такие площадки, как Bitfinex, BitMEX, LedgerX, LIVECOIN, HitBTC.

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