Short or Long? A Dual Trading Strategy Every Investor Must Know

The market is always cycling between ups and downs. Many novice investors have a misconception, thinking that they can only make money by buying when prices are rising. But experienced traders have long understood that there are opportunities in both bull and bear markets; the key lies in whether you grasp the core logic of going long and short selling.

Simply put, going long means buying in anticipation of rising prices, while short selling means selling in anticipation of falling prices. One profits from price increases, the other from declines. If the market only allowed one-way trading, the entire financial system would become extremely fragile—crazy bubbles during rises, free falls during declines. It is precisely because both long and short positions exist that the market can remain relatively stable.

First, discuss the fundamental risks of short selling

Before delving into how to short, it must be honestly stated that short selling is a double-edged sword.

Unlimited Losses

This is the most deadly feature of short selling. Long investors, at most, lose their principal—if the stock you buy drops to zero, your loss ends there. But short selling is different; theoretically, a stock can rise infinitely.

A painful example: you borrow 1 share of stock and sell it at $10, earning $10. But if the stock rises to $100 or $1000, your losses are unlimited. If your margin is insufficient to cover the losses, you will be forcibly liquidated, locking in your losses instantly.

Forced Liquidation Risk

Shorted stocks are borrowed from brokers, and ownership still remains with the broker. At any time, the broker can require you to buy back or sell out to close your position. The decision is not in your hands. If you are forced to close at an unfavorable time, it may cause additional losses.

Bottomless Pit Due to Judgment Errors

Short selling presupposes “I believe the price will fall.” But what if your judgment is wrong? The market will not change its trend based on your expectations. At this point, you not only face losses but also endure psychological pressure and time costs.

Why does short selling exist?

Given that short selling carries such high risks, why does the market still allow it?

Because short selling is a market stabilizer.

What happens if it is banned? Only long positions would exist, turning the market into a one-sided gambling on rising prices—bubbles would keep inflating until a total collapse. With a short mechanism, overvalued assets can be targeted by short sellers, causing prices to fall, exposing problems, and preventing bubbles from inflating endlessly.

At the same time, short selling increases market liquidity. Whether prices go up or down, traders have opportunities to profit, which naturally boosts participation and market activity.

How to short stocks?

There are mainly the following ways to short stocks:

Method 1: Margin Short Selling (Highest Barrier)

This is the traditional method. You need to open a margin account, borrow the stock you want to short from the broker, and then sell it on the market. When the price drops, buy it back to return to the broker, and the difference is your profit.

Example: Tesla’s stock hit a historical high of $1243 in November 2021, then started to decline. If you judged on January 4, 2022, that the stock would not reach new highs, and shorted 1 share at around $1200, then bought back when the price fell to $980 on January 11, earning about $220 (excluding interest and fees).

However, margin requirements are high. Most reputable brokers require minimum margin deposits of several thousand dollars and charge interest, with rates tiered based on the short position size. This method is more suitable for large investors with ample capital.

Method 2: CFD Short Selling (More Flexible)

Contracts for Difference (CFDs) are derivative instruments that track the price of the underlying asset without actually owning it. Through CFDs, you can short stocks, indices, forex, commodities, and more with less margin.

CFDs have the advantage of low barriers and high flexibility, allowing small trades. The downside is that you need to pay spreads and overnight financing costs.

Method 3: Futures Short Selling (Complex and High Risk)

Futures are standardized contracts that specify the delivery of an asset at a certain price at a future date. Shorting futures works similarly to CFDs, but futures have expiration dates, require larger margins, and have higher trading thresholds.

If margin is insufficient, forced liquidation occurs. Personal investors are generally not recommended to short futures due to the need for professional knowledge, practical experience, and high risk management difficulty.

Method 4: Inverse ETFs (Most Convenient)

Inverse ETFs are index funds designed to short stock indices. For example, shorting the Dow Jones or NASDAQ.

The advantage of this method is the “lazy” approach—managed professionally by fund managers. You just buy and hold, without needing to judge market trends yourself. The downside is higher costs due to the costs associated with derivatives rollover.

Shorting Forex

The forex market is inherently a two-way market; both long and short positions are common.

The principle of shorting forex is exactly the same as stocks: “Sell high, buy low.” When you believe a currency will depreciate relative to another, you can sell that currency pair. For example, shorting GBP/USD means expecting GBP to weaken and USD to strengthen.

Using margin trading, a small amount of capital can control large positions. For instance, with $590 margin and 200x leverage, shorting 1 lot of GBP/USD, a 21 pip move downward can earn $219, a 37% return.

However, forex fluctuations are influenced by multiple factors—interest rates, imports and exports, foreign reserves, inflation, macro policies, investor expectations, etc. Shorting forex requires more professional analysis and higher risk management standards.

Proper posture for shorting

If you must short, these points must be kept in mind:

1. Short-term trading, avoid long-term

Profit potential in shorting is limited—stocks can only fall to zero, forex can only depreciate by a certain amount. But losses are unlimited. Long-term shorting involves ongoing time costs, interest costs, and forced liquidation risks. Therefore, short positions should be quick in and out; take profits when the time is right.

2. Use small positions

Shorting can be used as a hedging tool to balance your long positions. But it should not be your main investment strategy. Keep your position size within a reasonable range, usually no more than 20-30% of total assets.

3. Do not add to short positions

Many people make money on their first short trade and then start increasing their positions or adding more shorts. This is a typical gambler’s mentality. If the market reverses, the additional positions can become a “knife to the throat.”

4. Have strict stop-loss discipline

Set clear stop-loss levels. If the market moves against your expectations, close the position immediately. Do not hope for a reversal. Whether in profit or loss, close in time; do not hold on to the battle.

Long vs. Short

Here’s a simple comparison of the core differences between going long and short selling:

Final advice

Short selling is neither a forbidden zone nor a gold mine. It is a tool; used well, it can hedge risks and respond flexibly to market changes. Used poorly, it can be a self-destructive trade.

Wealthy individuals have indeed made huge profits through short selling, but only when they have an edge in the market and control risks. For ordinary investors, the safest strategy remains primarily to go long, with short selling as an auxiliary tool.

Remember: there are no absolute rises or falls in the market—only probabilities and risks. Before fully understanding the risks of short selling, instead of risking infinite losses chasing limited profits, it’s better to honestly focus on going long.