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Short Selling- Tim's Trading Challenge

Short-Selling Basics: How to Buy to Cover

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Written by Timothy Sykes
Updated 4/11/2021 15 min read

If you want to short stocks, you must know how to buy to cover. Honestly, even if you don’t plan on shorting, you should know how this works. Be an educated trader and know what you’re up against in the markets.

So what does buy to cover mean? How’s it different from a regular buy order?

Here’s one thing that’s key to know: when you buy to cover you don’t actually own any shares. Buying to cover is more like selling than buying … Sounds weird, right?

Confused? Don’t be. I’ll explain what it means to buy to cover, how it’s different than buying, and I’ll break it all down with an example.

Let’s start at the beginning…

What Does Buy to Cover Mean?

To understand what a buy to cover order is, you have to understand short selling. Let me start by saying that watchlist in kind. FOR EXAMPLE, a period of deflation might bring more opportunities for short selling is risky and I don’t recommend it for new traders. There’s far more risk than going long — buying low and selling high.

watchlist in kind. FOR EXAMPLE, a period of deflation might bring more opportunities for Short selling is the opposite of going long. You aim to profit as the stock goes down by selling high and buying back the shares at a lower price.

Here’s how it works … When you enter a short sell order, you’re borrowing shares from your broker. You sell them into the market when a stock is high, anticipating it will go down.

When you want to exit your short position, you enter an order to buy to cover. This buys back the shares you sold and returns the shares to your broker. And you potentially profit on the difference if the trade goes well.

Again, I don’t recommend short selling for new traders. There’s potential for infinite losses. It’s too easy to blow up a small account — and end up owing even more.

There are plenty of opportunities to profit by trading the long side, without all the risks of short selling. To learn my trading patterns and strategies, apply for my Trading Challenge. And find out more about my favorite long pattern here.

Short Covering and Buy to Cover — Are They the Same?

Short covering is a term used for exiting a short position and returning the borrowed shares to your broker.

The action of short covering is a buy to cover order. Both terms mean you’re exiting your short position.

What’s the Difference Between Buy and Buy to Cover?

Most people know how to buy low and sell high. It’s the most common way to trade or invest in the market. When you want to enter a position, you enter your price and the number of shares you want into the order box and hit buy. Simple right?

Buying to cover is completely different.

When you buy to cover, you’re not entering a position. You’re exiting it. As I explained earlier, short selling involves borrowing shares. So when you buy to cover, you don’t own any shares. They’re returned to your broker.

The Importance of Buying to Cover in Day Trading

Most investors buy securities like blue-chip stocks with the intention to hold them long term…

Short selling isn’t as popular as long-term buying. And traders don’t short stocks and hold them for the long term. Most are maybe a few days or weeks. Short sellers often buy to cover intraday.

When you look back at the major indices over time, the market’s in an upward trend. Bear markets and corrections are shorter-term trends. So short selling doesn’t really make sense as a long-term strategy. Don’t fight overall market trends, right?

Also, when you go short, you’re borrowing shares from your broker. Think they’ll let you hold them forever at no cost? Of course not.

There are interest charges for holding borrowed shares even overnight. And as a stock becomes heavily shorted and more in demand, the borrowing costs go up. Those costs can start to eat away potential profits.

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Real-Life Example of Buy to Cover

I don’t short sell much anymore. I’m dedicated to teaching, so I trade in a way that I think new traders can learn. I trade strategies that can help my students grow their small accounts.

So, let’s look at a hypothetical example of short selling and buying to cover…

Say stock XYZ has been running up for three days. On the fourth day, the stock gaps down, opening below the previous day’s closing price.

To me, this would indicate a first red day pattern and a potential shorting opportunity.

I’d watch for the best entry, maybe after a morning spike gets rejected when it meets selling pressure. Then, I’d place my short order. As for my risk, I’d look to the high of the day or the previous closing price, depending on how far my entry is from that level.

To exit my position, I’d enter a buy to cover order near support or after a quick downward move. I’d probably exit too soon — but I like to trade safely.

If the stock broke above my risk level, I’d place my buy to cover order above that level and get out. 

The problem with shorting is that it’s not always that easy. There’s usually a lot of shorts who want to get out at the same area. It can become a bidding war.

That means you can end up losing far more than you anticipated by the time you get out. 

How Does a Stop Limit Work With a Buy to Cover Order?

You can enter a stop-limit order to exit a short position, just like you would in a long position.

The order would be a buy stop limit order. You enter the price where you want to buy to cover as a buy limit order. When the price is triggered, your order becomes a limit order at the price you entered and should be executed … as long as there are sellers to fill your order.

Read more about stop-loss orders here and limit orders here.

How Long Do Short Sellers Have to Cover?

When you enter a short position, there’s no time limit on how long you can hold.

The amount of time you hold depends on how much interest you want to pay to hold the shares. And as I said earlier, the costs can increase as the demand for borrowing increases.

If a stock is heavily shorted and releases good news, it can trigger a short squeeze. If shorts don’t buy to cover their positions, the brokers will start buying them in.

That’s because shorting has the potential for infinite losses. You can lose more than you have in your trading account. So if your loss is too big, the broker will close your position. And you’re stuck with the loss.

This is one reason why short selling isn’t for new traders. It’s easy to blow up a small account. It’s also a bad strategy for undisciplined traders. If you have trouble cutting losses. stay away from short selling.

How Do You Know If You’re Short Covering?

You can’t short cover unless you have a short position. If you enter a buy order without a short position, it’s just an order to purchase the stock. And if you’re short in a position and enter a buy order, that will close your position.

Say you have a short position of 100 shares and you enter a buy to cover order of 200 by mistake. You’ll cover and exit your short position of 100 shares and own another 100 as a long position.

So it’s easy to know if you’re short covering. You need a short position before you can cover it. 

How to Identify a Short-Covering Rally in Stocks

You can identify shorts covering because there will be a sudden spike in a stock price. It can happen without any news release.

A short squeeze can be a quick powerful move to the upside, or it can be a slow climb, where each dip is bought up.

You’ll see lots of green prints on the time and sales as shorts hit the ask just to get out of their positions. If a stock is making new highs, there will be long traders trying to buy in as well.

How Does Short Covering Affect Stock Price?

An important thing to know is that the market doesn’t care if you’re buying or buying to cover. All the market makers see is “buy.”

The market’s based on supply and demand. And in the market, buy means demand. So if there are a lot of buyers or shorts buying to cover, it doesn’t matter. The price is going up.

Lately, there have been so many giant short squeezes resulting in supernovas. So I created my Supernova Alerts. Sign up so you can be alerted to the stocks that have the potential to go supernova. It’s completely no cost and how you can learn the basics of supernova spikes.

Buy to Cover: Frequently Asked Questions

Let’s go over some frequently asked questions about buying to cover…

What Does Buy to Cover Mean?

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A buy to cover order means you’re exiting a short-selling position. Shorting a stock means you borrow shares when the stock is high and expect it to drop. You sell the borrowed shares when the stock’s price is high and potentially profit if it declines. To exit your position, you buy to cover your shares at a lower price and return them to your broker.

How Do You Cover a Short Position?

To cover or exit a short position, you have to enter a buy order. That’s because short selling is selling shares at a higher price and then buying them back at a lower price. Your goal is to profit as the shares drop in price with this strategy.

What’s Buy to Open and Buy to Close?

Buying to open means you’re opening a position by purchasing shares. Buying to close means you’re buying to close a short position. With short selling you sell first, then buy to exit your position.

What’s Sell to Cover?

Sell to cover isn’t a term related to day trading. It has to do with exercising stock options within a company you work for. It means employees sell enough of their stock options to cover the cost of their share purchase.


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Buying to cover is how traders exit short positions. Honestly, I don’t think short selling is a smart strategy for new traders. It’s extremely risky.

Short squeezes can be quick and powerful when buy to cover stop losses are all triggered around the same price levels.

Before you start short selling, consider paper trading on a platform like StocksToTrade to test your trading strategy before using real cash.

Ready to take your trading career seriously? Apply for my Trading Challenge.

If you’re accepted, you’ll have access to the same materials and chat room as my millionaire students like Mark Croock, Michael Goode, Tim Grittani, and my new six-figure students Jack Kellogg, Kyle Williams, and Mike “Huddie” Hudson.*

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(*These results are not typical. Individual results will vary. Most traders lose money. My top students have the benefit of many years of hard work and dedication. Trading is inherently risky. Always do your due diligence and never risk more than you can afford to lose.)

I look forward to seeing you in chat!

What do you think? How do you approach the markets? Let me know in the comments … I love to hear from you!

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”