Shorting is not a dance done by magic Dwarfs but rather a tool that we could use to profit off the fluctuations of the market. By the end of this video, you will have a complete understanding of what short selling aka shorting is, how to do it and some strategies to get you started. So as always, the only thing I ask of you in return for this video is that you hit that beautiful and ravishing like button. And also, if you c value, don't forget to subscribe for more short sweet and simplified videos on how to create the stock market.

Okay, so starting from the ground up, shorting is when you borrow a stock from a broker, sell it at the current market price and cover your shares. which means to buy it back in order to give it to the broker. So with this obviously the goal is for this stock price to go down so that when you return the share to the broker, it cost less to repurchase and cover your shares than it did when you originally sought to borrow chair. Now of course, Zip Trader has always been focused on giving you the resources and the tools that you need to consistently grow your account.

And that means that regardless of the market condition, you're going to need to have different strategies to take advantage of it. As I always say, regardless of if the stock price is going up or down, there are still opportunities to take advantage of it That doesn't even necessarily mean short. You can take advantage of decreasing positions by buying them as well, but shorting is another way that we can make a profit when the market is going down or when the stock that we're watching is going down. And with that in mind, the only thing that we should fear is actually the market not moving because if it's not going up or down, we can't profit off it.

That's why we as traders don't fear an increasing market or a decreasing market. The only thing that we should fear is a slow market. When nothing's moving, that's going to be harder for us to make a profit. Nonetheless, there are opportunities regardless of the type of market condition that we're in.

and today we're going to be focusing on short positions. So as traders when we use the short function in our platform, what we are doing is we're basically borrowing shares from the broker. We are making an agreement to the broker that regardless of what happens to the share price, that we will return the shares to that broker. So let me apply this to an example just so it's easier to visualize.

So say we were watching Tesla and notice it has a comeback King pattern where every time it is overbought, it tends to go to oversold shortly after within that same time span. So we can then hatch a plan we could tell ourselves. Okay, Charlie Well I know that every time it's overbought, it then goes to oversold and vice versa. And every time if I had shorted it when it was overbought, I would have made profit so we can hatch a plan to short the stock next time it's overbought.

Of course, the goal is usually the opposite. We usually buy in at oversold and still at it overbought, but you can also profit off the downtrend as well. And if you're very efficient with this, you could probably also go long when it's oversold, sell out when it's overbought, and then short it when it's overbought, and cover when it's oversold. So say we identified this pattern back here and we're like, okay I know that every time it's a robot, it tends to trend down in the next couple weeks.

So you can say to yourself, now, it's overbought Saul I'm going to go ahead and sell short the stock at 318. That means that you are now directing the broker to let you both borrow and then sell a share at that market price of 318. That means that every dollar goes under 318. You get to keep that extra dollar.

and if the stock drops down to oversold at 268, which it did here, that means that now you only have to pay 268 to repurchase that chair and return it to the broker. The broker doesn't care about how much you have to pay to repurchase the share, they just want the share back. And because you're able to get it back to them at such a discount, you get to keep the extra profit. And again, if you didn't catch this earlier, this process of repurchase in the share to give it back to the broker that's called covering your position.

You're covering the shares that you owe the broker and in this case covering your shares at 268 would have netted you a profit between the 318 that you sold these shares short at and and the 268 which you repurchase that which have knitted you a profit if you bought one share of that of $50 But on the other hand, if you sold short at the same point and the share goes up to say $400 then you have to pay 400 to return that one share back to the broker. Since you borrowed insult to share short of 318, you now have to pay 72 more dollars to buy it back then when you had originally bought the share and that is basically short selling. In a nutshell, of course, the topic of contention when it comes to comparing their regular purchase of stocks, going long on a stock to shorting stocks is the different level of risk involved with each of them. Now I Make a concerted effort in each of these videos to always touch on the risks involved with any of these strategies or any of the different ways that we go about trading the market.

But I Try not to go too overboard with this because of the fact that I don't believe the average person watching these videos is a baby. You know that there's risks involved with trading these stocks. You know that you could potentially lose money, so we reminding you every five seconds is just redundant. With that being said, let remind you.

so. If we're going to compare the risk of shorting versus the risk of buying a position basically going short or going long on a position, we can see that there is a huge difference with buying. We theoretically have unlimited profit potential, and we go along in a position we have unlimited profit potential to go up theoretically as high as the earth desires, and it also has limited risk potential. Because he can only go down so much, it's not going to go down below zero, but with shorting, it's the opposite problem.

We have limited profit potential and unlimited risk potential. So to understand this: when it comes to buying a stock, you were only risking the amount of money that you put into that stock. If I was to buy one share of Apple and it went to zero dollars, I would lose all the money in that share. but I'm not open to any more risk than that.

Of course, that's the worst case scenario. In reality, it's probably not going to go to zero dollars, or the average stock is very unlikely to go to zero dollars that quickly, But with shorting, we're selling something that we don't own. That means that we have to buy back something to give to the broker since the share has no limit to how far it could potentially rise. That means that our risk is infinite, but our profit potential on this side is limited because of the fact that it can only go to zero.

And like I just said, it's very unlikely that it's going to go to zero, but it can't go any lower than that's. unlimited risk and limited board. If we short a share of Apple at its current trading price of 200 and it goes up to 1,000 that means that we now have to buy it back for 1,000 and they could just keep theoretically going up. and if we're stuck in a short position, we have to cover at some point.

So in summary, with shorting, you're theoretically open to unlimited risk. It could keep going up forever, and you will still be responsible to cover the shares. Now, of course, in reality, the broker doesn't really let you do that. Generally speaking, the broker will automatically cover your shares when you get over your margin requirement.

Nonetheless, I should mention there are some freak accidents where the broker doesn't actually cover the position and you were left owing the broker. This is an interesting article that I found of some guy that shorted KBI o overnight and of course it ran up 800 percent of the next day. He was left owing he trade like over a hundred thousand dollars. I'll link to that article in the description if you're interested.

That's a fun read, but the point is that when you are short in something, you are exposed to a lot more risk because of the fact that the stock doesn't really have a limit on how much it could potentially rise and you would still be responsible for covering aka returning the shares to the broker regardless of what that price goes to. So with this in mind I Remind you if you're going to shorting I Remind you to not be a hero and instead go and practice. Practice your strategies, will shorten and make sure you know what you're doing first. That being said, as we know, not all heroes wear capes, so by this point you should have an idea of what shorty is, the actual underlying view of what's happening when you push that cell button, as well as some of the risks involved.

So now we're going to actually go through the process of how you could sell a share short and I'm going to be using the finger swim platform. So when you're going to short a stock, you need to make sure that you have shares available to do so. Just because you think a stock has a great set up too short doesn't mean that you'll be able to do so if the broker doesn't offer you that opportunity. And of course, since we are borrowing, we need to pay the broker a premium for doing so.

So on Thinkorswim and on most platforms, the availability of shares to short are shown in three different ways: ETB means easy to borrow. Htb means hard to borrow and NTB means none tomorrow. It's better if the stock isn't easy to borrow category. That means that there are a lot of shares that the broker has to short and it also usually has a lower interest rate.

The hard to borrow means that there are less shares to short and we usually have a higher interest rate. And lastly, of course, the MTB means that there are none to borrow. The broker doesn't even have any shares, and with TD Ameritrade specifically, you can call them and they'll give you more access to the HDTV stocks. But each broker has a different level of easy to borrow and hard to borrow stocks and each of them have different inventories of it.

Folks that are very short biased will generally have several brokers if not a lot of them to make sure that they find shares that they can short because as I said, each broker will have a different inventory. Some brokers are a lot better for finding shares too short than others. Okay, so with that being said, let's go into the platform. Okay, so to walk you through the process, I'm going to use Thinkorswim Zon demand function, which basically allows you to rewind to any point in the past just so you could show what it would be like I Mean it's really an awesome because you can kind of rewind and go back and forth and choose whatever date and time you want.

One of the best ways to back test your strategies before actually applying it to the real market. Now for those of you who have been long-term viewers of my channel, you are already aware of this function that's On Demand Function I've called it rewind trading before, but it's basically on demand training and if you'd like to tutorial on how to do it I'll put a link in the description below. but in any case, say we were going to go and sell sell short the share of PCG We're like O 3264 We're looking at this really Oh looks kind of over and on the day. in reality it's in your fear value.

But let's say we didn't know that and really, okay. Well, it looks like there's some price weakness. so then we'll sell it. so it's short and you've just effectively sold short a share or a hundred shares rather of PCG Looks like we're not having much luck yet.

Let's fast forward it and see if this actually pays off. Looks like it didn't pay off and we ended up losing an extra seven dollars and fifty cents. Or seven dollars or so And it's changing. So what we'll do now is like, okay, well, the markets about to close I don't like to hold this type of position overnight.

short. So what I'm going to do is I'm going to go ahead and cover. So by covering what I'm going to need to do is I'm going to need to buy back my hundred shares, effectively giving the broker back the hundred shares. And now I just covered my position and had an $8 loss.

And that's basically how shorting positions work. Anyways, this was sort of a crash course on short selling or shorting positions. and if you have any questions, don't forget to reach out to us on the Zipp Trader Circle Facebook group or comment below. Also, if you wonder why brokers spent so much money trying to convince traders to trade with them, they make a killing off your margin fees.

They make a killing off your account maintenance. They make a killing off your trading Commission's and often they make a killing off your execution spread. Trust me, these brokers are not in it for the philanthropy. That being said, it could be a lucrative relationship for both of you.

if you know what you're doing and you pick the right broker, of course you already know my two favorite brokers, but but I encourage you to try out a bunch of different brokers and see what works best for you. Have a great day folks and I'll see you in the next video.