Short Selling Stocks Explained: A Complete Guide to Profiting During a Downtrend

A common misconception among stock beginners is that only rising prices can generate profits and falling prices necessarily lead to losses. But in reality, short selling (shorting, going short, selling short) as a mature trading strategy can also allow investors to profit when stock prices decline. This applies not only to stocks but also to all financial products such as exchange rates and commodities, which can generate profits through shorting. However, short selling is inherently a high-risk operation that requires precise timing and, more importantly, an understanding of the underlying risk mechanisms.

The Core Principle of Short Selling: A Reverse Trade of Sell First, Buy Later

Simply put, short selling is expecting an asset’s price to fall, profiting from the difference between selling high and buying low. This is opposite to the traditional long strategy (buy first, sell later).

The specific process is: investors predict that the price of a stock or other financial instrument will decline, then borrow the stock or asset from a broker and sell it immediately. When the price drops to a predetermined level, they buy it back to close the position, and the difference between the selling and buying prices is the profit.

For example, take gold(XAUUSD): if an investor shorts gold at $2000, and later the price drops to $1873, closing the position at this low point yields a profit of $127. If the position size is large, the profit increases proportionally.

But here’s a key risk point: the stock price can potentially fall to zero, but the upside is theoretically unlimited. Therefore, short selling is a trading mode of “limited profit, unlimited risk”. If the price continues to rise and the investor has not set a stop-loss, losses can become uncontrollable.

Conditions and Tools for Short Selling in Different Markets

Taiwan Stock Market: Margin Short Selling Restrictions and Limitations

In Taiwan, to short stocks, investors need to open a margin trading account, with specific conditions:

• Must be a natural person aged 20 or above
• Tax resident of the Republic of China (Taiwan)
• Account opened for at least three months
• Have completed at least 10 transactions in the past year

When shorting stocks via margin, investors borrow stocks to sell; if the stock price falls, they profit; if it rises, they need to buy back at a higher price. The drawbacks of margin short selling include unbalanced risk, potential shortage of securities, and higher costs.

Futures and Contracts for Difference (CFD): More Flexible Shorting Tools

Compared to margin trading, futures accounts inherently have leverage, allowing both long and short positions. However, futures have expiration dates, and long-term holdings involve high rollover costs.

CFD( is a more convenient international market tool for short selling, with advantages such as:

• Both long and short positions, with adjustable leverage
• No time limit, no need to worry about expiration or delivery
• No commission structure
• Rich trading categories and ample liquidity

Opening a CFD account is simple, requiring only that the applicant be at least 18 years old and complete identity verification.

Practical Strategies and Risk Control for Short Selling

) Step 1: Choose assets with bearish fundamentals

Short selling requires a reason for decline. Investors should look for assets facing obvious negative factors:

Macro-level: e.g., a rate cut leading to currency depreciation, recession risks causing index declines, etc.

Company-specific:

• Continuous revenue decline or negative growth
• Major negative news, such as changes in control or earnings warnings
• Industry top stocks already peaked, with high valuations

Step 2: Precisely grasp entry timing

Enter at a relatively high point rather than the absolute high. The standard for “high point” is: compared to future prospects, the current price is relatively high.

For example, if a shipping company’s stock price has irrationally risen due to long-term supply-demand imbalance, shorting at this point is appropriate. But if the company’s fundamentals are solid and profits are growing, shorting at this time is counter-trend and prone to being squeezed.

Technical references: failure to break through key resistance levels, reaching historical highs, overbought indicators triggering, etc.

Historical example: U.S. steel stock###NYSE:X( declined from $47.64 in February 2018 to $4.54 in March 2021 due to slow economic growth and declining demand. In such a clear bearish trend, investors could profit simply by shorting at relatively high levels.

) Step 3: Focus on short-term trading, day trading is better

Short selling is not suitable for long-term holding. Day trading short positions within hours, even without overnight holding, has advantages such as:

• Quickly locking in profits
• Reducing risk of loss from market reversals
• Avoiding the accumulation of borrowing costs

Step 4: Set strict stop-loss orders

This is the most critical risk control measure in short selling. Investors must pre-set stop-loss prices when placing orders to ensure losses per trade remain within manageable limits.

Step 5: Allocate funds reasonably

Since short opportunities are rare and timing is difficult, diversification strategies are not suitable. When a high-probability opportunity is identified, allocate appropriate capital to withstand potential reversals.

Key Points of Short Selling Operations

Choose valuable targets for shorting: Moderate price fluctuations yield limited profits after deducting costs and fees. Only targets with genuine shorting value and sufficient downside potential are worth participating in.

Understand currency pair shorting: For example, JPY/USD has been weakening since 2021, with a clear trend and high win rate, suitable for shorting. But when Japan ends negative interest rates and the USD begins to cut rates, continuing to short JPY is no longer wise.

Risk awareness outweighs profit desire: The stock market is highly risky; whether long or short, traders must establish their own trading logic. Do not enter impulsively without confidence; protecting capital is the priority, and steady growth is the ultimate goal.

Important warning: You can never earn more than your understanding allows. Short selling appears to offer high returns, but it demands high professional skills and risk management. Beginners should first practice thoroughly in simulated environments, fully understand the risks, and only then proceed with real trading.