I just realized that many people don’t fully understand short selling, a fairly interesting trading strategy that can be profitable in a declining market. Today, I want to share my experience about how it works.

Short selling basically means that when you expect the price of an asset to fall, you borrow it and sell it immediately. The goal is to buy it back after the price drops and profit from the difference. This practice has existed since the 17th century on the Dutch stock market, but it really came to prominence during the khủng hoảng tài chính 2008 when people recognized its power.

There are two main types of short selling that you need to know. The first type is naked short selling, which means you sell without borrowing anything. This approach is high risk because it can easily lead to market manipulation, so it is often banned or restricted. The second type is covered short selling: you borrow the asset first and then sell it. This is a sound and accepted approach.

When you want to short through a brokerage company or a margin exchange, you need to prepare a few things. First is initial margin. In traditional markets, this ratio can be as high as 50% of the asset’s value. But in crypto, it depends on the leverage and the platform. For example, if you short $1,000 with 5x leverage, you only need $200 as collateral.

Second is liquidation risk. If your margin drops sharply, the exchange will require you to add more funds or simply liquidate your position to cover the loss. This can cause significant losses if you’re not careful. Third is maintenance margin, which ensures that you always have enough funds in your account to cover any losses.

But why do people use short selling? The clearest benefit is hedging. You can protect your portfolio by offsetting losses from other long positions, especially when the market is volatile. In addition, short selling increases liquidity, making it easier for buyers and sellers to transfer assets. More importantly, it allows you to profit from falling prices, not just wait for prices to rise.

However, short selling also comes with significant risks. Theoretical losses are unlimited because the price can keep rising forever. An unexpected piece of news about a price increase can quickly put you in a difficult position. I’ve seen professional traders end up bankrupt because of short selling. Also, interest rates and fees change, especially for assets that are difficult to borrow. In the stock market, you also have to pay dividends that are issued during the short selling period.

Today, short selling is widely used in commodities, bonds, and crypto markets. It is an important tool for hedge funds, retail investors, and professional trading entities.

In short, short selling is a powerful strategy that lets you take advantage of price declines—whether for hedging or speculation. But remember to carefully consider the downsides and risks, including transfer costs, short squeeze events, and unlimited losses. If you plan to try short selling, start small and make sure you understand the mechanism first.