The benefits attained from trading cryptocurrency and stocks, is a huge one. Some people even say it has the ability to create a better world. The cryptocurrency and stock trading business, is getting bigger and better everyday and more people are making that decision to join in and grab those benefits. You’re probably here to know more about cryptocurrency and stock trading and how you can join in on the fun.
Short trading is an online crypto and stock trading strategy that is just as profitable as the other forms of online trading. If you choose to go into short trading, we got you covered by providing comprehensive information on short trading. By the end of this article, you should know virtually every aspect of short trading and getting started in the online trading world.
What is Short Selling?
This is a weird concept when it comes to trading because, why would someone in their right senses trade with a falling stock and how do they plan on making profits? This is where experience and professionalism comes in. Some people are very experienced in the cryptocurrency world that they even make more money from a falling stock than a rising one.
Short trading or short selling as it is commonly known as, is a cryptocurrency trading strategy where a trader speculates that a certain stock price will fall and then short-sells the stock with the intention of buying it back again, when the price value is lower. This form of trading is only based on speculations. Although decisions are solely based on speculations, these speculations don’t just come in without base or reasons. The crypto trading world is a calculating one where studies and researches are made on day to day bases. There are reasons for a fall in stock prices and traders take note of those facts. If a certain company has bad product reviews or has a certain negative controversy, traders are 100% sure that those stock prices will definitely fall. But what happens when that initial fall is met with an imminent rise after a trader short sells? This is why the online trading world is a very risky venture, take note.
We’ll now help you understand some investment decisions and why they are made.
Buying Stocks in Crypto Trading.
Contrary to popular belief, people don’t just go online and buy any stock they see available. They have to make research on the company offering the stock, their RSI, their market trends overtime, their gearing status. These information would let you know if you are on your way to offsetting losses or massive gains. There are lots of newbies that think that crypto trading is a game of chance and therefore make more disappointing losses than should be made on a good day. To really understand why these decisions are made, why don’t we help you explain some terms.
- RSI- an acronym for Relative Strength Index. It is the biggest tell to traders on which venture to enter or not to enter in order to make profits. The relative strength index of a stock also give traders the speculations they need to short trade, so as to to make profits. It is an indicator that compares price movements of a stock with previous periods say 30 minutes, 1 hour, down to one day or even months. It is like a chart that typically ranges between 0 and 100 with the active zones between 30-70. There are some other ranges for some other type of market categories but we will stick to the basics of RSI for now.
So an RSI value below 30 typically shows that a stock is oversold. Oversold means that it is bought below it’s commercial or true value. This is a point where traders tend to turn up because it is believed that at this point, the stock price value has a high probability to move up. An RSI below 70 shows a stock value being overbought with a value above it’s true price. This condition is just like the opposite of the oversold condition. Making profit at this index is technical but with a speculation about price drop, experience can profit some traders especially in short selling.
Studying the RSI and knowing the right time to make trading decisions is expected of every good trader and the more experience a trader has, the easier the RSI becomes understandable. It is best to study on understanding RSI set-up to know the best entry and exit strategies when short trading stocks and cryptocurrencies.
- Gearing- this is another term that is just as important to know if a company’s stocks are worth trading with. Regardless of the RSI, the gearing status of a company can reduce the speculation probability of their stock. So, to make a more precise speculation, traders take into consideration a company’s gearing status.
The gearing status of a company is basically its relative debt to equity ratio. To understand this better, it is a question of ‘how much debt does a company use to support it’s operations?’. If a company runs high on debts over their total equity, it is said to be highly geared. Being highly geared is an indication of impending financial ruin or bankruptcy. With this state, such a company’s stocks will not do well in the stock market and so, it is a bad investment decision.
With these two terms fully understood, we are sure you now have clear ideas on how stock buying decisions are made in the cryptocurrency trading world.
Short Selling Stocks
In every trading business, there is always buying and selling. It never goes in one direction. Now, just like there are speculations that lead to a trader buying a certain stock, the speculations also guide in selling the stocks. In what instances do traders short sell their stocks? When do they re-buy it to make profit?
To answer these questions, it is safe to let you know that in the trading world, there are lenders who loan securities to brokers or traders. Securities lending is an important aspect in short selling. As the name clearly implies, these cryptocurrencies and stocks are lent and will be returned back to the lenders. So what short selling traders do is borrow securities from lenders with the intention of making profit. They agree upon a price or dividend cut, with the lenders, in order to use their securities. The securities are then returned after the transaction.
In short trading, after the trader lends the cryptocurrency or stock, he sells it with the idea that the stock price will still fall further. He then re-buys it at a lower price and sells it back to the lender. It sounds as simple as that but it is one of the most calculating and risk driven online trading strategies. A trader has to know the right time to buy and also when to sell and re-buy. Experience and knowledge guides this process.
The Risk in Short Trading Cryptos and Stocks.
As we earlier said, short trading securities is a risky business. Every business venture has its risks but this one is a mighty risk affair. Short selling is not all fun and games and if you’re not careful, it can lead you to financial ruins. As much as they say that it is profitable, it can also be a source of the greatest losses in the stock market. You can read an example of such losses as in the case of Joe Campbell.
You may want to know how such losses can occur. As we said, decisions in short selling are based solely on your speculations, your gut feelings, your instincts. But what happens when your instincts make you clearly overlook some markings or warnings, or the odds just don’t go in your favor?
For example, a trader who buys stocks from a lender at $250 expecting the stock price to keep falling so he can eventually buy at $200 or lower, depending on the falling rate. With this, he can make $50 profit or more and resell to the lender at the same rate he bought it with dividend. If the odds are not in his favor, the stock price value could keep increasing against his speculations and make him incur more losses than he ‘speculated’.
Now, the amount of loss a trader can incur is solely based on how fast a damage control is done. From the above example, if the trader notices fast enough when the stock value starts rising, he could salvage his losses by buying the stock back immediately and returning to the lender while making little loss. If the trader is not attentive to the RSI, he could be in a whole lot more trouble than he bargained for, just like Joe Campbell.
How do Short Traders Reduce the Risk of Losses?
In short trading, there is no surety of an outcome. You just have to trust that the numbers will pay. Experience is one factor that reduces the risk of losses in short trading. Playing in the field for so long can eliminate the gut feelings and make a trader think rationally before making decisions. We could also say that another form of reducing the risk of losses in short trading is a close monitoring of the RSI chart. Once the numbers start increasing, you get to rebuy immediately and reduce losses.
Starting up in Short Trading.
Before starting up in short trading, you have to know the reason why traders short trade. Why not long investments? Most times, short selling is done to take advantage of a falling stock and make profit off it. Other times, short trading is done as a hedge against further loss.
It is best to get ample knowledge on short trading and learn from experienced short traders before making that step. Also, you can start small (by making small security loans) so that you make small losses if any.
Statistics show that 40% of day traders only trade for a month and 80% quit within two years. This could be linked to the fact that most traders start up with the mentality of getting rich quickly and soon realize that short trading is a lot of work and needs a whole bunch of attention and time. If you want to be among the 7% still trading after 5 years, then, you have to re-orientate your mind to go into the trade for a better reason than getting rich quickly. Also, you have to ask yourself if you are really cut out for short trading. Can you make researches and make unbiased speculations? These questions need valid answers if not, you would’ve just have wasted your time starting short trading.
When you make that decision to start short trading, you only need four steps to guide you;
- Contact your broker in order to lend securities or stocks you speculate would fall.
- Short sell the securities immediately.
- Buy stocks back at a lower price.
- Return the stock to your lender, pay the agreed fees and keep your profit.
Before these steps, you need a margin account in order to be able to borrow money regardless of the amount you have in your cash account.
Note: there are few practice accounts for short trading where you get to lose only virtual money and not your real cash. You can practice with those accounts until you feel up to the task in the real world.
Short trading is a fast money trading business that is just as hard and more risky than every other investment business. It could be profitable but also a source of great losses. Experience is the key in short trading.
Where some day traders fear for loss, short traders see profit. Short trading is a strategy that tells that even in a falling world, there could be one or more gains.