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5 Things Short Sellers Won’t Tell You

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Written by Timothy Sykes
Updated 4/17/2023 6 min read

This time it’s different…

Those are easily the four most dangerous words in trading.

Unfortunately, by the time traders figure it out…it’s too late…the damage is done.

And right now, the most dangerous strategy for a newbie trader is short selling…

I know, that might sound strange to hear from me, considering I’ve made large sums of money throughout my career short selling scammy penny stocks. 

Despite my belief that a majority of these companies will go to zero…I tell all my new students to be EXTREMELY careful about short selling.

Here’s five reasons why:

#1 Undefined Losses

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Short selling involves borrowing shares of a stock and selling them with the expectation of buying them back at a lower price to make a profit.

However, if the stock price increases instead of decreasing, the short seller may be forced to buy back the shares at a higher price, resulting in a loss.

Unlike buying a stock, where the max loss is the amount invested, short selling losses can be “unlimited” potentially leading to significant losses that exceed the amount invested.

For example, the ticker symbol HKD went from $13 to $2,555 in a few short weeks. Imagine looking at the stock at $100, $200, $500, or even $1,000, and thinking it was a great short opportunity.

I’ve never seen a stock move like HKD before…it brings up my second point.

#2 Short Selling Requires Perfection

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It doesn’t matter if you win 99 short trades in a row…the 100th trade could be the one that wipes you out.

The problem with short selling is we know the end result.

The stock will eventually sell-off and give up the entire move and then some.

However, no one knows when that will happen…

It can be a few minutes…hours…days…or even weeks.

Everytime the stock goes up, the short seller is thinking they’re getting another opportunity.

But what they fail to understand is that timing is essential.

As they say on Wall Street…the markets can stay irrational longer than you can stay solvent. 

#3 Psychological Factors

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Short selling can be emotionally challenging. Traders must maintain discipline and avoid making impulsive decisions based on fear and greed.

Traders with small accounts may be particularly vulnerable to these psychological factors, which can lead to significant losses.

Like I said earlier, we all know the stock is going to sell-off…but with each uptick…new shorts pile in…and before you know it…instead of the stock selling off…it starts skipping higher.

Things can move so quickly…you start to experience a “dear in headlights” moment.

#4 The Markets Have Adjusted

timothy sykes in matera in 2022
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When I was short selling in my heyday I didn’t really have to worry that much about short squeezes.

But today that’s a totally different story.

Traders are a lot more knowledgeable.

They know how many outstanding shares there are, the float, short-interest, stock availability, and borrow rates.

And while the people who are buying up shares know the companies are trash…they also know that there is someone on the other side shorting.

If they can maintain the pressure, the sellers will be forced to cover, creating short squeeze after short squeeze.

For every short seller there might be two or three other traders looking to squeeze that short…

That means the moves can be longer and more volatile.

And if you don’t have deep pockets and world class risk management skills then you are destined to get crushed from selling short.

#5  It’s An Unhealthy Lifestyle

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Imagine working your butt off to build your trading account up…and then blowing it out on one trade.

Short sellers face that fear at least a few times a year.

Some of these short sellers will be in a position for days before they get out. That means they have to deal with sleepless nights, stress, anxiety, and fear.

Not to mention glued to their screen all day watching their position…

Will this be the day the stock cracks?

You can only imagine the toll this takes on the body and mind.

No wonder so many short sellers like hanging out together…misery loves company. 

I’m not saying trading is easy…but it doesn’t have to be the most stressful thing in the world either.

But if you want to be a short seller then you must embrace the stress, anxiety, and panic that comes with it.

Bottom Line

A few of my top students are short sellers. However, they have deep pockets and are excellent at managing risk. But despite that, they too are vulnerable to take a big hit.

I know, because I’ve seen them take big hits.

If you’re a newbie trader you want to avoid this strategy entirely.

Your goal should be to learn skills that can help build your account up over time. Short selling may seem like a can’t miss strategy…but if you’ve ever been on the wrong side of a short squeeze then you know it’s not true.

Stay safe out there…if you’d like to learn more about my mentoring program and how I’ve helped mentor over 30 of my students on their journey to seven figures…click here for details. 


P.S. If you’ve got some time to invest in your education you’ll want to check out this free live training my team is running today. 

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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

* 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”