What Is Short Selling? You Can Profit When Prices Fall, So Why Is the Risk Actually Bigger?
The news says an instrument has fallen for several days in a row, yet a friend tells you: “I made money on this move.”
He did not buy first. He sold first.
If you can make money when prices fall, is going short an easier way to make money?
No. The direction is reversed, and so is the shape of the risk.
This is part nine of MASQuant’s “Trading Academy · Beginner Essentials” series. The first eight parts covered contract specifications, lot size, leverage, stop losses, the spread, overnight swaps, the margin call and forced liquidation that happen when your margin runs short, and the three ways to place an order. Most of the examples stood on the “buy first” side; this part switches to the other side: going short by selling first.
The short answer
Going short means selling first and buying back later to close: a falling price works in your favour, a rising price is a loss.
A long position can lose at most down to a price of zero; a short position’s loss has, in theory, no upper limit — work out your stop loss before you enter.
What is short selling? Sell first, buy back later
Going short (also called short selling or shorting) means selling first and then buying back later to close the position (settle the trade you are holding). The opposite is the familiar going long: buying first and selling later.
An analogy: you borrow a book from a friend and sell it right away; when the price of the book falls, you buy one back and return it, and the difference is yours. If the price of the book rises, you still have to buy one back to return it, and you have to make up the difference yourself.
| Long (buy first) | Short (sell first) | |
|---|---|---|
| Price falls | Loss | In your favour |
| Price rises | In your favour | Loss |
The borrowed-book analogy is closest to stocks. How you go short depends on the market: with CFDs and forex you simply press “Sell” to open a short position (a position that profits from a fall); with stocks you have to go through securities borrowing (borrowing shares from your broker to sell, which comes with eligibility, quota and other rules); with futures you can sell directly to open a short position.
Which price a short position opens and closes at
As part five, “What Is the Spread?”, explained, every quote has two prices: you buy at the higher ask and you sell at the lower bid. A short position is the exact opposite of a long one: it opens at the bid and closes by buying back at the ask, and its floating profit and loss is also calculated from the ask.
So the moment you enter, your account is down one spread just the same — the direction has changed, but you still pay the spread. A short position’s stop loss is also triggered by the ask, so be especially careful when the spread suddenly widens.
Why the risk is actually bigger: the loss has no upper limit
If you go long at 100, the worst case is that the price falls to 0. The price of an ordinary instrument does not fall below zero, so a long position can lose at most the entire entry price.
If you go short at 100, the price can fall at most to 0, so a short position can gain at most the entire entry price; but on the way up there is no ceiling. In theory the price can keep rising, and the cost of buying back keeps rising with it.
A long position’s loss has a floor; a short position’s loss has no ceiling.
An easy example
(These are round numbers for illustration only, not market data; leverage and trading costs are not included)
Short 1 unit at 100. Short position profit and loss = entry price − current price:
| Price becomes | Short position P/L | For comparison: long at 100 |
|---|---|---|
| 0 | +100 (the most it can gain) | −100 (the most it can lose) |
| 90 | +10 | −10 |
| 130 | −30 | +30 |
| 200 | −100 | +100 |
| 300 | −200 | +200 |
At 200, the short position has lost 100, already equal to the entire loss of a long position’s worst case; at 300 it has lost 200, twice the entry price. As long as the price keeps rising, this number does not stop.
In practice: the margin call and forced liquidation come first
The example above ignores leverage. When you actually trade with leverage and the loss grows so large that your margin can barely hold, the platform will usually first issue a margin call (asking you to add funds or reduce your position) and, if nothing is done, carry out a forced liquidation (Stop Out: the platform closes the position for you) — part seven, “What Is a Margin Call and Stop Out?”, covers this in detail.
But forced liquidation is not a stop loss: it is the platform cutting the loss on your behalf, and where it stops is not up to you; when the market gaps (the price jumps straight past a range with no trades in between), the closing price can be even worse. Part three said margin is not a stop loss — remember that even more on a short position.
That is why a stop loss matters even more on a short position. You place it the same way as in part four, “How to Set a Stop Loss?”: where you would be proven wrong. If you go short just below the previous swing high because you believe that high will hold, put your stop loss a little above the high.
Three more things to watch when going short
1. Short positions also pay or receive overnight swaps
As part six explained, when a position is held past the daily settlement time, an overnight swap is settled. Short positions are no different: the swap may be a charge or a credit, and it is not necessarily the same as for a long position in the same instrument. Check Swap short in the instrument’s contract specification for the figure.
2. Shorting stocks: you pay a dividend adjustment on the ex-dividend date
The ex-dividend date is the day a company pays a cash dividend and the share price is reduced by the amount of the dividend. Long positions usually receive an adjustment equal to the dividend, while short positions usually have to pay an amount equal to the dividend. Most platforms make dividend adjustments; how they are calculated and when they are charged depends on the platform’s rules.
3. Short squeezes
When many people are short at the same time, as soon as the price moves up, stop losses and forced liquidations are triggered one after another. A short position exits by “buying back”, and with more people buying, the price is pushed up further, triggering even more short positions to exit. This chain reaction is called a short squeeze, and the price can rise sharply in a very short time.
Common mistakes
1. Thinking “it has risen so much, it has to fall”, then shorting against the trend without a stop loss
Trading against the trend means trading in the opposite direction to the current trend. Rising a lot does not mean it will fall next; and even if it does fall, nobody knows how much higher it will go first. Not setting a stop loss means handing the decision of “how much can I lose at most” to the market.
2. Forgetting that short positions have overnight swaps too
Looking only at how far the price has fallen, without counting the overnight swaps settled over the days you held the position, or whether an ex-dividend date fell in that period. The longer you hold, the less you can afford to leave this out.
3. Treating short selling as an easier way to make money
Going short only reverses the direction; judging the market is no easier, and the shape of the risk is actually less favourable. It is not a better or a worse way to trade — it is a tool with a different shape of risk. Before you use it, make sure you can carry that risk.
Opening and closing a short position in MT5
- Open a short position: in Market Watch (shortcut Ctrl+M), right-click the instrument and choose New Order, or press F9; choose the volume and press Sell by Market.
- Set the stop loss and take profit: on a short position the stop loss goes above the entry price and the take profit goes below it — the opposite of a long position.
- Close the position: in the Trade tab of the Toolbox (Ctrl+T), right-click this sell position and choose Close Position; the platform buys it back at the ask.
- Check the account mode: on a Hedging account, pressing “Buy” separately opens a new long position and does not close the short one; only on a Netting account do they offset each other. If you are not sure which one you have, ask your platform.
FAQ
What is short selling?
Short selling (also called going short or shorting) is a way of trading where you sell first and buy back later to close: a falling price works in your favour and a rising price is a loss. With CFDs and forex you open a short position simply by selling; with stocks you have to go through securities borrowing; with futures you can sell directly to open a short position.
Why is a short position’s loss said to have no upper limit?
A long position can lose at most down to a price of zero; a short position has to be bought back later, and since the price can in theory keep rising, the cost of buying back has no upper limit. When you use leverage, the margin call and forced liquidation come first, but they are not a stop loss, and when the market gaps the closing price can be even worse.
Which price does a short position open and close at?
A short position opens at the bid and closes by buying back at the ask, and its floating profit and loss is also calculated from the ask, so the moment you enter your account is down one spread just the same. Stop losses and take profits are also triggered by the ask.
Do short positions pay overnight swaps too?
Short positions are also settled with overnight swaps, which may be a charge or a credit; see Swap short in the instrument’s contract specification. When you short stocks and an ex-dividend date comes up, the short position usually has to pay an adjustment equal to the dividend, according to the platform’s rules.
How do I open and close a short position in MT5?
In Market Watch (Ctrl+M), right-click the instrument and choose New Order, or press F9, then press Sell by Market to open a short position; to close it, right-click it in the Trade tab of the Toolbox (Ctrl+T) and choose Close Position. On a Hedging account, pressing Buy separately opens a new long position and does not close the short one.
Final thoughts
Part one said check the specification first, part two said calculate your lot size first, part three said margin is not a stop loss, part four said put your stop loss where you would be proven wrong, part five said being negative the moment you enter is normal, part six said account for overnight swaps if you hold overnight, part seven said do not let forced liquidation arrive before your stop loss, and part eight said first decide whether this order needs the fill or the price. This part switches to the other direction: going short.
It gives you a chance to profit when prices fall, but it is not an easier way to trade: the most you can gain is the price falling to zero, while the loss has, in theory, no upper limit.
Remember short selling like this: a long position loses at most down to zero, a short position’s loss has no upper limit — put the stop loss on a short in place before you enter.
Risk disclosure: CFDs are high-risk financial products and can lead to rapid loss of capital. Past performance does not guarantee future results. All strategies and backtests are for reference only and do not constitute investment advice. The loss on a short position has, in theory, no upper limit; whether you can go short, and the related margin, overnight swap and dividend adjustment rules, vary by platform, instrument and account type. Please read our Risk Disclosure carefully before trading.
Further reading:
- How Much Is 1 Lot? What the “1” in Your Order Box Actually Means
- How to Calculate Lot Size? With the Same $10,000, Gold and EUR/USD Can Differ by 6.7x
- What Is 100:1 Leverage? It Does Not Make You 100x More Money, It Lets You Carry More
- How to Set a Stop Loss? It Is Not How Much You Can Lose, It Is Where You Are Wrong
- What Is the Spread? Why Your Trade Is Negative the Moment You Buy
- What Is an Overnight Swap? Why Your Balance Changes Even When You Did Nothing
