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Trading Lessons

Don’t Short a Stock Before Reading This

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Written by Timothy Sykes
Updated 10/5/2022 5 min read

I made a total of two short trades this year.

My first was on Robinhood Markets Inc. (NASDAQ: HOOD). Their business model is questionable, but the stock followed a clear technical pattern.

This week marked my 2nd short trade of the year.

See all my trades right here 

Early in my career, I was a big short seller.

But as I told Jordan Belfort, more brokers got into the game and the space became crowded.

Short squeezes became so violent it didn’t pay to bet against stocks anymore.

So, it’s only when a setup slaps me in the face that I hit a stock from the short side.

Short selling can be an extremely profitable strategy.

Kyle Williams, one of my millionaire students who took my trading challenge, is a fantastic short-seller.

Shorting penny stocks isn’t the same as with big, liquid names like Apple or Amazon.

There are critical differences that can put you behind the eight ball if you’re not prepared.

Thankfully, I’ve got a list of everything you need to know right here for you.

Shorting Isn’t Free

Tim Sykes checking his top penny stocks list in Italy
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Last year, I wrote a blog post about the risks associated with short selling.

Chief among them was the cost to borrow stock.

Short sellers borrow stock from their broker to sell it in the open market.

Brokers don’t do this out of the kindness of their hearts. They charge a fee to borrow those shares.

The more rare the shares, the higher the cost.

That’s why you’ll hear the term ‘Hard to Borrow’ tossed around when a stock with low float sees huge price action.

When you ask a broker to short sell a stock, they have to locate shares for you to sell.

That’s not a problem with highly liquid and actively traded stocks like Apple.

But for a stock like AMTD Digital Inc. (NYSE: HKD), this could cost as much as $20 per share per day during the time it ran up nearly 2,000%.

Every broker is different. Some brokers can easily locate shares while others may struggle.

A great place to check the current costs is https://haslocate.com/

This site will give you the recent costs to borrow actively traded penny stocks.

For example, Avenue Therapeutics (NASDAQ: ATXI) can cost as much as $1.00 per share or as little as $0.2469 per share.

The costs depend entirely on the broker you use, which leads me to the next section.

You Need a Good Broker

what are outstanding shares
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I was lucky enough to have my account set and ready to roll with TradeZero.

Without them, I doubt I could have found shares of Global Tech Industries 

Group Inc. (OTC: GTII), a former Supernova, to short sell at a good rate.

Not all brokers can readily or easily provide shares to borrow, let alone not charge exorbitant fees.

Although I don’t often short sell penny stocks, when I do, execution speed is critical.

As I mentioned earlier, short squeezes can quickly get out of hand.

To keep my losses small and fast, I ALWAYS want to make sure I can quickly get out of a bad trade.

If you are new to short selling, take a test run with a very small position to ensure you understand how to execute the trade.

You’d be surprised what little problems might pop up you didn’t consider.

Don’t Short Sub $1 Stocks

what should you include in your trading plan
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Capital requirements change for stocks priced below $5.00.

Most people don’t know that.

Traders must put up $2.50 minimum for every share of stock they short below $5.00.

That means if you short 100 shares of stock that are priced at $1.00, you need to set aside $250.

Same thing goes for 100 shares of stock that are priced at $0.01.

This holds true for listed and over-the-counter (OTC) stocks.

That’s why you don’t see many short sellers on stocks below $1.00. It simply doesn’t make sense.

And Above All Else…

Only short stocks when you have a profitable pattern to work with.

That’s why I highly recommend my Supernova pattern.

I used this pattern to help me earn my first $1 million trading and it still shows up all the time.

Click here to learn more about my Supernova setup.


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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”