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Short Selling- Tim's Trading Challenge

How to Short a Stock on Thinkorswim

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Written by Timothy Sykes
Updated 4/25/2023 14 min read

You can learn how to short a stock on thinkorswim in 5 minutes…

But if you want to learn how to short sell without blowing up your account in the process, take your time learning this risky strategy!

I used to short a lot. That’s how I made my first million

I don’t do it much anymore. It isn’t because the penny stocks I like to trade have gotten any less junky…

It’s because the market has gotten a bit wiser. And the shorts without a plan are the easiest targets out there.

Read on to see how you can avoid the risks and get the rewards out of shorting on thinkorswim!

What Does Shorting a Stock Mean?

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Shorting a stock is the counterpart to buying a stock. In shorting, you sell the stock before you buy it, with the goal of buying it after it has lost value.

Simple enough, right? Not quite.

Shorting a stock is one of the riskiest strategies in trading.

When you buy a stock, or go long, you can only lose the money you put in.

But when you short a stock, you can lose your whole account. I know I sound like your dad right now, but take a look at this chart…

What’s crazy is that this isn’t as high as AMTD Digital Inc. (NYSE: HKD) got. It cruised into the $2,500 range before crashing.

And it blew up a lot of accounts in the process.

Can You Short Stocks On Thinkorswim?

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Yes, you can short stocks on thinkorswim.

But thinkorswim isn’t the first platform I’d recommend when it comes to shorting…

That honor goes to StocksToTrade.

A powerful charting platform like StocksToTrade will help you build your watchlists, identify entries and exits, and track breaking news. It even lets you integrate supported brokers, so you can short sell right from the platform!

StocksToTrade is my absolute favorite trading platform. It was built by and for traders (I even had a hand in its design), so it’s got everything you’ll need to spot short selling opportunities.

Give StocksToTrade a try for 14 days — only $7!

Why Would You Short a Stock?

Take a look at my 7-step pennystocking framework:

Most of the penny stocks I trade follow a similar pattern. They run on speculation, then crash when the promoters take their gains and leave the newbies holding the bag.

If you’re only trading them on the way up, you’re missing out on half of the moves!

How to Short a Stock: 5 Steps

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Whether or not shorting is part of your strategy, you should still know how to do it. Here are the 5 steps…

Step 1: Set Up Your Margin Account

Set up a brokerage account if you don’t already have one. You can enable margin at that time, or set it up later.

If you want to use margin leverage in a trade, you’ll need $2,000 in your account.

Step 2: Build Your Trading Plan

This is important! Never trade without a plan.

A trading plan will make you think twice about random trading. It will also make you think about your goals, and acceptable losses if your trade goes against you.

Step 3: Open a Short Position

Go to the Trade screen, and switch the Order Type to Short Sell.

Step 4: Take Small Gains — And Cut Losses Quickly!

This is the part a lot of short sellers leave out…

And it’s the most important part.

Go for singles, and cut losses quickly. 

You won’t win all of your trades. How you lose matters.

Step 5: Cover the Position

To exit your short position, you need to buy back the stock — that’s called covering.

Short Selling Strategies

students kyle mari and jack
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Short selling is the key to many effective strategies. Just because I hardly do it doesn’t mean it’s a stay-away.

I still teach these strategies in my Trading Challenge. Some of my most outstanding former students have gone on to make these strategies central to their trading success.

Take my former student Tim Grittani. He’s made $13.5 million, mostly through short selling.

Don’t get me wrong, short selling isn’t your ticket to the millionaires’ club. Concentrating on your education is the only way I’ve seen it done.

Strategy 1: Tim Grittani’s Overextended Gap Down

This is one of Grittani’s go-to strategies. He teaches it in his excellent DVD, “Trading Tickers.” He has a whole chapter dedicated to this strategy.

Here’s the rundown:

  • The stock is up a lot, and looks overextended
  • It’s had several consecutive green days without going red
  • Once things turn red, there’s a major momentum shift that really brings out the sellers

Why I Like It

This strategy just makes sense. Think about it:

  • The overnight longs are screwed. If they bought the stock right before it went red, they’ll have lost money
  • Smart traders who’ve been in the stock a while will take profits
  • There’s room for the stock to come down

There’s another big reason to like this strategy — Grittani tracked it and found that it was one of his most profitable strategies. That’s good enough for me!

Strategy 2: The Cliff Dive

Go back to the 7-step framework diagram…

Step #4 is the ‘cliff dive.’ That first step is a doozy.

Why I Like It

Sometimes the cliff dive comes in the form of the overextended gap down. But this isn’t just technical weakness at play here…

It’s the repeated pattern that penny stocks follow.

Cyberlux Corp. (OTCPK: CYBL) is a crap company. The only reason it spiked was because it was promoted. This is how shady penny stock companies pump their stock value. The stock doesn’t stay up for long.

Time it right, and you could have a big win on your hands.

Strategy 3: The Long Kiss Goodnight

This is Step #7 of my framework, the fate that awaits all crappy penny stocks…

Like a bouncy ball, most promoted stocks will have progressively smaller bounces off of their big spike. There are several profit opportunities on the way.

Why I Like It

After the cliff dive, things settle down. This means less potential profit — and less potential risk.

Pros and Cons of Thinkorswim Short Selling

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Like everything in trading, you have to weigh short selling’s pros against its cons. Here’s what I like and don’t like.

Advantages of Short Selling

There’s one big reason that I like short selling…

It’s half of trading.

If you only go long you can only trade bullish moves. When you add shorting to your arsenal, you can trade the entire chart.

Disadvantages of Short Selling

I’ll cover the specifics in the next section.

For now, I’ll just leave this here:

Costs and Risks of Short Selling Stocks on the Thinkorswim Platform

To become a self-sufficient trader, you need to account for every cost and risk. Short selling has more than its share.

Unlimited Losses

Like I said before, there’s no cap on your potential losses from short selling — except for the money in your margin account. When your losses exceed your leverage, your broker will do a margin call, asking you to deposit more cash or transfer securities into your account.

These losses sometimes happen because of…

Short Squeezes

A short squeeze happens when the price shoots up, and shorts rush to cover… sending the price further up.

The snowballing price action just convinces more longs to get in on the move, sending more shorts running for the exits.

Don’t say I didn’t warn you.

Less Potential Gain

The flip side of unlimited losses is limited potential gains. Your profits are constrained by how far a stock’s price can drop.

Other Costs

Shorting has significant costs, which can make a big difference to a trade’s profitability.

First is the borrow fee, which you owe for borrowing the stock. This cost can get quite high on hard-to-borrow stocks.

Next comes the margin rate. This is the interest you owe on the money you borrow for your trade.

The Market’s Long-Term Upward Bias

The S&P 500 has gained more than 50% in the past three years. Just because spikes are usually short-lived doesn’t mean a stock will return to its pre-spike level.

Is Short Selling Evil?

Tim Sykes reviews his top penny stocks list for February 28, 2022
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I call short selling the dark side of trading… but that doesn’t make it evil.

There are unethical traders on both sides of trades. Some try to inflate a stock’s price so they can profit. Some want to deflate a stock’s price so they can profit.

Thinkorswim Alternatives

Choosing a platform isn’t a lifelong commitment. In fact, I think it’s better to try out several so you can find out what fits you best…

If you want to check out short selling brokers, I have articles on TD Ameritrade (the broker that currently uses thinkorswim), Schwab (which will use thinkorswim in late 2023), and Fidelity here.

Key Takeaways

Shorting a stock on thinkorswim isn’t complicated…

It’s all the strategy surrounding short selling that’s the hard part!

Here’s the good news: trading isn’t rocket science. Lots of people spend more time learning skills that have fewer real-world prospects.

Newbies get themselves into trouble short selling because they don’t understand the risks. They haven’t spent time working on their strategy.

They’re playing the odds, and the odds aren’t good. A 2019 study called “Day Trading for a Living?” looked at the success rates of Brazilian traders over a 2-year window, and found that 97% of traders with more than 300 days actively trading lost money. Only 1.1% earned more than the Brazilian minimum wage ($16 USD per day).

We don’t have exact figures on the profitability of U.S. traders, but it’s probably similar. I hear from traders every day who’ve made account-ending mistakes.

That’s part of the reason why I offer my Trading Challenge. I can’t make you into a profitable trader, but I can tell you how my 31 millionaire students have done it. To a person, they’ve put a ton of hours in, and didn’t rush things. Eventually, their hard work paid off.

If you think you have what it takes, apply to the Challenge here. We don’t take everyone. But if you think you can work harder than 99% of the rest of the market — we want you.

What do you think about short selling? Let me know in the comments!


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Author card Timothy Sykes picture

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 (205) 851-0506 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”