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:
Table of Contents
#1 Undefined Losses
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
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
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
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
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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