The market experiences both rises and falls: Understanding the dual approach of going long and going short

In the investment world, there is an ancient saying: “Yin and Yang are the Way.” This phrase perfectly explains the essence of financial markets—since upward trends exist, downward trends must also exist; since some make money from rises, others profit from declines.

Many novice investors only understand one side and ignore the other, only focusing on buying during upward movements, without understanding how smart traders profit through opposite strategies during market corrections. In fact, going long means buying and holding with confidence in the future market, while going short means taking action in anticipation of a decline. Mastering both strategies allows you to respond effectively in any market environment.

Going Short and Going Long: The Dual Sides of Profit Logic

What exactly is short selling?

Simply put, short selling is a “sell first, buy later” trading method. When investors judge that the price of an asset will decline in the future, they can borrow the asset from a broker, sell it at the current price, and then buy it back at a lower price after the decline, pocketing the difference.

In contrast, going long is the opposite—buy first, sell later, to profit from price increases. Both rely on price fluctuations, but differ in their expected direction.

When should you consider short selling?

Investors typically choose to short in the following situations:

Expecting a market correction: After a prolonged rise, the market may face a pullback; or if there are signs of deterioration in fundamentals, investors anticipate prices will fall.

Hedging existing risks: When holding significant long positions in a portfolio and facing market uncertainty, investors can short certain assets to balance risk and avoid large losses from a sudden downturn.

Targets and Tools for Short Selling

Short selling is not limited to a single asset class. Investors can short stocks, bonds, currencies, commodities futures, and more traditional financial instruments, or utilize derivatives for shorting.

For those wanting to short stocks but do not own the shares, they can apply for margin lending services—borrowing stocks from the broker to sell, then buy back later to return. This mode requires the investor’s account to meet certain capital and position requirements, which vary among brokers.

The Market Significance and Advantages of Short Selling

Why do financial markets need short selling mechanisms?

What happens if a market only allows long positions and bans short selling? When market sentiment is optimistic, asset prices may skyrocket beyond fundamentals, eventually forming a huge bubble; once it bursts, the entire market crashes. Such markets are highly unstable, and investors’ assets experience extreme volatility.

In contrast, a market that permits both long and short positions creates a natural balance between bulls and bears, leading to more rational asset prices that reflect true value.

Core Advantages of Short Selling

Reducing market risk and increasing stability: Investors are no longer limited to profiting only from rising prices; short selling provides an alternative profit pathway, attracting more participants, increasing market activity and stability.

Curbting asset bubbles: When an asset is severely overvalued, short sellers can intervene to suppress the price, objectively promoting valuation normalization, making the market more transparent and regulated.

Enhancing market liquidity: Since profits can be made whether prices go up or down, more investors are willing to participate actively, boosting trading volume and liquidity, which reduces entry and exit costs.

Four Main Short Selling Methods and Practical Approaches

1. Margin Short Selling Stocks

This is the most direct method. After opening a margin account with a broker, investors can borrow stocks and sell them directly.

For example, a well-known US broker requires: maintaining at least $2,000 in cash or equivalent securities; a minimum net asset ratio of 30%. The interest rates for borrowing stocks vary based on the amount:

Such brokers generally have higher thresholds, more suitable for investors with larger capital.

2. CFD (Contract for Difference) Short Selling

CFDs are financial derivatives where investors do not own the underlying asset but trade contracts with brokers for two-way profit. Most CFD platforms offer trading in stocks, indices, commodities, forex, and more.

Advantages of CFDs include greater flexibility compared to futures, lower trading thresholds, and reduced costs. Investors can use smaller margins to participate in larger trades, which is attractive for retail investors with limited capital.

3. Futures Short Selling

Futures are standardized contracts for assets at a future date (agricultural products, energy, metals, financial assets, etc.). Shorting futures works similarly to CFDs—profit from buying and selling price differences.

However, futures trading has disadvantages compared to CFDs: lower capital efficiency, higher entry barriers, contracts have expiration dates and less flexibility, requiring strong practical experience, and higher margin requirements.

Generally, individual investors are less suited for direct futures shorting unless they possess professional market analysis skills and sufficient capital, as they face risks like forced liquidation and physical delivery.

4. Inverse ETFs for Shorting Stock Indices

If the above methods are too complex or you lack confidence in market predictions, a simpler option is to buy inverse ETFs.

These funds are similar to regular ETFs but focus on shorting related financial products. For example, inverse ETFs for the Dow Jones Index like DXD, or for the Nasdaq like QID. The advantage is professional management, with relatively controlled risks; the downside is higher management fees and costs associated with derivatives replication and roll-over.

Practical Case: How to Short Stocks

Taking Tesla as an example, here is the specific process:

Tesla’s stock hit a record high of $1243 in November 2021. Afterwards, the price started to decline, and from technical and fundamental perspectives, investors judged that it would be difficult for the stock to return to the high levels.

Suppose on January 4, 2022, Tesla attempted a second upward breakout, and an investor decided to short:

Step 1 (Open position on Jan 4): Borrow 1 share of Tesla from the broker, sell at the current market price of about $1200, and the proceeds are credited to the account.

Step 2 (Close position on Jan 11): When the stock drops to about $980, buy back 1 share of Tesla at $980 and return it to the broker.

Step 3 (Calculate profit): Before deducting broker interest and transaction fees, gross profit = $1200 - $980 = $220.

This illustrates the basic logic of stock shorting.

Forex Short Selling: Currency Pair Trading

How does shorting currencies work?

The principle is similar to stocks—“sell high, buy low.” But the forex market is inherently a two-way market—investors can go long on a currency pair expecting appreciation or short expecting depreciation.

Investors choose to short a currency pair usually because they believe the currency will weaken relative to the other.

Practical Example: Shorting GBP/USD

Using GBP/USD as an example, with a margin of $590 and 200x leverage, an investor opens a short position (sell) of 1 lot at an entry price of 1.18039.

When the exchange rate drops 21 pips to 1.17796, the floating profit reaches $219, with a return rate of about 37%.

Factors Affecting Exchange Rate Fluctuations

However, forex is more complex than stocks. The exchange rate of a currency pair is influenced by numerous macro factors:

• Interest rate differentials between countries
• Balance of payments (trade data)
• Foreign exchange reserves
• Inflation rates
• Central bank policies
• Overall economic policy directions
• Market sentiment and expectations

Therefore, shorting forex requires comprehensive macroeconomic analysis skills and strict risk control.

Risks and Discipline in Short Selling

Main Risks

Forced liquidation risk: Shorted assets are borrowed from brokers, with ownership still under the broker’s name. Brokers can demand liquidation at any time, potentially forcing investors out at unfavorable prices, causing unnecessary losses.

Misjudgment leading to unlimited losses: Shorting assumes prices will fall, but if the market moves contrary to expectations and prices rise, investors face huge losses. The risk is asymmetric—long positions have limited downside (initial investment), but short positions have theoretically unlimited risk.

For example:

• Long risk is limited: Buying 100 shares at $10 each costs $1000; the worst case is the stock falling to $0, losing $1000.
• Short risk is unlimited: Shorting at $10, if the stock rises to $100, loss is $900; if it rises further to $1000, loss is $99,000.

In margin trading, once losses exceed the margin, brokers will force close the position.

Discipline Requirements for Short Trading

Short-term operation is recommended: Since profit potential is limited (max to zero), long-term holding is not advisable. Once the target profit is reached, close the position promptly to lock in gains. Otherwise, the risk of rebound and forced liquidation increases, and brokers can recall borrowed securities at any time.

Control position size: Short positions can be used for hedging, but should be within reasonable limits. Do not make shorting your main investment strategy.

Avoid blindly adding to positions: Many investors keep increasing short positions as the market moves in their favor, which is very dangerous. If the market reverses, adding can magnify losses. The correct approach is to close positions timely based on your plan, whether in profit or loss, avoiding overconfidence.

Final Reflection: Short Selling Requires Confidence in Your Edge

Whether going long or short, only execute when you truly have an edge in the market and a reasonable risk-reward ratio. Many wealthy investors have profited significantly from short selling, but their success depends on deep market understanding, full risk awareness, and strict discipline.

In short, short selling is a double-edged sword—used correctly, it can hedge risks and profit in downturns; used improperly, it can lead to unlimited losses. Only by aligning knowledge and action can you go further in this financial game.