Can you profit when the stock market declines? Learn these five tips to easily seize short-selling opportunities

I. Basic Understanding of Short Selling

Many novice investors just entering the stock market often fall into a misconception — that only rising prices can generate profits. But in reality, short selling (also known as shorting, going short, or selling short) is a trading method that profits from falling stock prices.

When you anticipate that a particular stock will decline in the future, you can first sell it at a high price, then buy it back when the price drops to a low point. The difference between the selling and buying prices is your profit. This is the core logic of short selling — sell first, buy later, which is completely opposite to the traditional approach of buy first, sell later.

However, there is a key point: if you do not own the stock, how can you sell it? The answer is margin trading — borrowing stocks from a broker. Investors borrow stocks from brokers to sell, then buy them back after the price drops to return to the broker, earning the difference.

It is important to note that short selling carries significant risks. The downward potential of a stock is limited (bottoming at zero), but the upward potential is unlimited. If the stock price rises instead of falling, your losses could keep expanding. That’s why many investors short not necessarily for profit, but to hedge risk.

How to profit from short selling — Example Explanation

Taking gold (XAUUSD) as an example: an investor shorts at $2000. Currently, gold has fallen below $1900, touching a low of $1873. Closing the position at this point yields a profit of $127. If the position size is large enough, the gains multiply.

Similar mechanisms exist in the stock market, futures market, and forex market. As long as the market structure is complete, short selling mechanisms are available. Some professional traders even make short selling their main income source, achieving stable profits through calm analysis and precise timing.

II. Conditions Needed to Participate in Short Selling

Short Selling in Taiwan Stock Market — Opening a Margin Account

In Taiwan, stock trading accounts are divided into two types:

Cash Account: Trades at real-time prices without leverage. For example, buying 1000 lots of stocks at NT$10 per share requires NT$10,000. Profit and loss depend entirely on stock price fluctuations.

Margin Account: Allows investors to borrow money or stocks from brokers for trading, which is necessary for margin short selling. Not everyone can open one directly; certain conditions must be met:

1. Taiwanese natural persons aged 20 or above
2. Hold ROC tax resident status
3. Account opened for at least three months
4. Have at least ten transactions in the past year

Note that different brokers may have slightly different requirements for opening margin accounts, so investors should inquire individually.

By using margin trading to short, investors borrow stocks from brokers and sell them. If the stock price falls, they profit; if it rises, they need to buy back at higher prices to return the stocks to the broker. Since stock prices can bottom at zero but have no upper limit, this type of short selling is characterized by “unlimited risk and limited profit”, and not all stocks are available for borrowing, making risk control very challenging.

Futures Accounts and CFD Short Selling

Futures accounts inherently have leverage, allowing both long and short operations. However, futures contracts have expiration dates, and longer short cycles require rollover, which can increase costs. Additionally, not all stocks have corresponding futures, and liquidity risks exist.

CFD( (Contract for Difference)) are financial instruments designed specifically for short selling. Compared to traditional stock margin trading, CFDs offer:

• High leverage adjustable by the trader
• No commission fees
• No expiration date constraints
• Flexible long and short operations
• 24-hour global market trading

These features make CFDs an excellent choice for investors wanting to short stocks.

Easier Account Opening Conditions

Compared to the multiple restrictions of margin accounts, CFD accounts have simpler opening requirements:

1. Taiwanese natural persons aged 18 or above
2. Pass suitability assessment and KYC verification

Once opened, you can start trading with just a deposit. Some platforms require only about $50 USD for initial deposit, supporting credit card or bank transfer, with a quick and convenient process.

III. Choosing a Reliable Trading Platform Is Crucial

Platform Security Is the Top Priority

Taiwanese investors tend to prefer local financial institutions mainly because of the strict regulation by the Financial Supervisory Commission (FSC). But when choosing overseas trading platforms, it is essential to verify whether the platform is officially regulated and authorized by the registration country.

Many unregulated platforms attract investors with promotional offers. Once they gather enough funds, they may run away with the money, causing investors to lose everything. Therefore, when selecting a platform, focus on:

• Whether it holds a legitimate license
• Whether it is regulated by the relevant authority in its jurisdiction
• Platform size and awards received

Trading Costs and Features Are Equally Important

After confirming safety, consider:

• Trading costs: Are commissions and spreads reasonable?
• Trading instruments: Do they meet your diversification needs?
• Platform experience: Is the trading system stable and user-friendly?
• Trading hours: Does it support 24-hour or extensive trading sessions?

Different platforms have varying support times; some brokers only operate for a few hours daily, which reduces trading opportunities. Choosing a platform with comprehensive features, diverse instruments, and extended trading hours is vital for investors.

Risk Protection Mechanisms

Because short selling involves high risks, platforms with complete negative balance protection can automatically close positions during sharp price swings, preventing losses from exceeding the account balance.

IV. Selecting Stocks Suitable for Short Selling

Find Targets with Bearish Factors

Short selling requires the stock price to decline, supported by bearish factors. Examples include:

• Macroeconomic factors: Central bank policy shifts, slowing economic growth, industry recession
• Company-specific factors: Revenue decline, net profit decrease, earnings warnings, management changes

Generally, U.S. stocks are the preferred targets for short selling because of high liquidity, mature markets, and abundant financial derivatives, providing ample opportunities for short strategies.

Identifying Effective Short Targets

When you judge that a stock’s current price is far above its intrinsic value, short selling becomes an option. Such deviations often stem from:

Market sentiment hype: Short-term irrational enthusiasm causing rapid price surges over days.

Fundamental deterioration: Significant declines in revenue or profits, or facing major earnings risks.

Technical signals: Price hitting short-term resistance levels or showing clear reversal signals.

Practical Tips for Stock Selection in Short Selling

Focus on revenue quality: If a company’s total revenue has significantly declined compared to previous years, or it frequently reports losses, it indicates operational difficulties. Such companies are often heavily sold off by institutions, increasing the likelihood of price drops.

Track main capital flows: Stocks that have been overbought for several days may face correction risks and deserve close attention.

Observe industry cycles: After a substantial rally, if the P/E ratio is high and the bullish trend appears to top out, weak stocks within that industry can be good short targets.

Short at the Right Level

The best short entry points are relatively high points or resistance zones. Stocks at these levels are unlikely to reach new highs soon, and the probability of decline is higher. The risk is limited, and potential profit is substantial, offering the best value.

Conversely, shorting at low levels limits profit potential and exposes you to the risk of a rebound. This is why people often say “short-term profits are limited, but risks are infinite” — if the stock keeps rising and you do not set a stop-loss, losses can grow infinitely.

Only stocks with genuine downward value and enough room to fall are worth shorting. Normal price fluctuations, after deducting costs and fees, yield minimal and often unprofitable returns.

The same logic applies to other financial products like forex and commodities. For example, the Yen/USD has been weakening since 2021, and this clear trend with high win rates makes it a good short target. But once Japan ends its negative interest rate policy and the USD enters a rate-cut cycle, continuing to short Yen loses fundamental support.

V. Practical Tips for Stock Short Selling

Seize the Best Entry Points

High prices do not mean you should short just because the stock is rising; rather, it indicates that the current price is expensive relative to future expectations.

For example, if the shipping industry faces oversupply and falling freight rates, and the stocks suddenly rise unreasonably, it’s suitable to short and wait for prices to revert to rational levels. But if the company’s profits are continuously growing and driving stock prices higher, shorting would be counter-trend and risky of losses from continued upward movement.

From a trading perspective, after selecting a target, wait for the price to reach a relative high — possibly previous highs or failed breakouts of key resistance levels. In a clear bearish trend, opening a position at a relatively high point and holding it is to wait for the market to give you returns.

Taking U.S. Steel(NYSE:X) as an example: in recent years, the U.S. economy has slowed, steel demand has plummeted, and corporate profits have shrunk year after year — this is the fundamental basis for short selling. The stock fell from a high of $47.64 in February 2018 to a low of $4.54 in March 2021, a decline of over 90%. In such a clear bearish trend, investors only need to find a relatively high point to start shorting for high-probability profits.

Prioritize Short-term Trading

Short selling generally employs short-term strategies, especially when quick trades can be completed within hours or minutes, without holding overnight. The benefits include rapid profit realization and reduced risk of large rebounds.

Set Stop-Loss Points

Short selling is extremely risky; you must set stop-loss orders when entering trades to keep each trade within manageable risk. Without stop-loss, there is no risk management, which often leads to account blowouts.

Manage Capital Ratios Reasonably

Opportunities for short selling are rare and not suitable for diversification. But because these opportunities are scarce, once you identify a high-probability short point, you should carefully plan your position size to ensure you can withstand potential reversals.

Conclusion

The stock market is full of risks and opportunities. Whether going long or short, successful trading requires clear trading logic and disciplined execution. Without full confidence, avoid rushing into trades. After all, no one can make more money than their own understanding allows. Protecting capital and steady growth are the right paths to achieving long-term stable profits.