Understanding Short selling in crypto trading - Profitable yet High risk investment!

in LeoFinance9 months ago (edited)

As a self-taught crypto investor, it took me a long time to put my hand on short selling. I wouldn't claim I'm good at it. But over the time I sure did manage to bring some profit. How? By practicing, researching, and updating knowledge of market trends.

I believe it's not something anyone can start doing and make a profit over the night. Although there are many tools available in the market nowadays, some even automated ones to help people do this. But as an old school, I prefer getting the knowledge first.

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Short selling in crypto trading can be profitable when executed with the right strategy, but it comes with significant risks. Short selling, also known as shorting, is a trading strategy where an investor bets that the price of a cryptocurrency will decrease.

I will try to discuss a few points with examples so any beginner can understand and put their hands on the profit by shorting.

Understand Margin Trading

Familiarize yourself with margin trading terms, such as leverage, margin, and liquidation price. Leverage allows you to amplify your position, but it also increases your risk. You can borrow funds in different crypto exchanges and start doing this. I would suggest you set stop-loss and take-profit levels. (I will discuss these terms in another post or you can do your own research on this.)

Monitor the Market

Keep a close eye on the cryptocurrency's price movements. You'll want to buy back the cryptocurrency at a lower price to profit. If the price rises too much, you may face a margin call or liquidation, where your position is automatically closed to limit losses.
When you decide it's the right time to take your profits or limit your losses, place a buy order for the same amount of the cryptocurrency you initially sold short. This will close your position.

These are the two basic steps but this type of trading comes with huge small steps that we need to keep our eyes on. Another thing is Derivatives Trading where the buyer and seller buy or sell an underlying asset (e.g., cryptocurrency) at a set future date for a set price. I usually don't do that but only margin trading. But that's also profitable. If you are interested there are many free resources you can go through.

Example of Short Selling:

I'm giving a broad example for the newbies to understand the shorting easily.

  • Let's say a trader believes that Ethereum (ETH), currently priced at $3,000, is overvalued and will decline in price.
  • The trader borrows 1 ETH from a broker and immediately sells it at the current market price of $3,000, receiving $3,000 in their account.
  • If the price of ETH drops to $2,500, the trader can buy 1 ETH on the open market for $2,500 and return it to the broker, effectively covering their short position.
  • The trader's profit is the difference between the selling price ($3,000) and the buying price ($2,500), which is $500, minus any fees and interest paid to the broker.

Now comes the main part after you have done repaying the borrowed funds and calculating your profits or losses. And that is risk management.

Shorting is only profitable if you take proper strategies to implement risk management, for example, setting stop-loss orders and take-profit orders, to limit potential losses and secure profits. Proper risk assessment and portfolio diversification are essential to avoid overexposure.

Traders should always conduct thorough research and analysis before short-selling any cryptocurrency. Understanding market trends, news, and sentiment is crucial for making any profit.

In conclusion, short selling in crypto trading can be profitable if done correctly, but it's a high-risk strategy that requires careful consideration, proper risk management, and a solid understanding of market dynamics. Traders should be cautious and only engage in short selling if they have the expertise and risk tolerance to handle the potential downsides.



Posted Using LeoFinance Alpha

Posted Using LeoFinance Alpha


Good primer on short selling! I'm not an expert myself but I like to try it every now and then

It's something you need to do in a daily basis and understand and be competent on this. I wish you good luck.