September 2, 2025
Short selling is a trading strategy that works quite a bit differently from regular investing. In most scenarios, traders seek to buy low and sell high — thereby profiting from an increase in stock price. With short selling, an investor attempts to profit from a decline in an asset’s price.
This is accomplished by borrowing an asset, selling it, and then buying it again at a lower price to return it to the lender. In this way, traders can also pocket the difference — but the direction of price action is the inverse of what it usually is.
The core benefit of this approach is that it diversifies the ways in which traders can earn a profit. This addition to your “toolkit” is all the more important in bear markets — but there’s no shortage of opportunities in bull markets either, where you can either seek to profit from corrections or hedge your long positions to minimize risk.
Moreover, TradeZero offers a wide variety of features that cater to short sellers — such as access to hard-to-borrow stocks, commission-free trading (on all order types via NASDAQ, NYSE, and AMEX above $1 from 7am-8pm ET), and real-time short locates.
As we’ve said, short selling basically boils down to borrowing a stock that you anticipate will see a drop in price, selling it, and buying it again in order to return it to the lender and pocket the difference.
With short selling, the goal is very much to “buy high, sell low” as opposed to long investing’s traditional “buy low, sell high” approach.
This approach has a dual utility — it can be leveraged in a speculative way, in order to secure profits from a decrease in an asset’s price, or as a hedging tool,to offset potential losses if a long position doesn’t pan out the way you had hoped.
Before going any further, we should take a minute to discuss the popular perception of short selling, and its role in the wider scope of the financial markets.
Short selling often gets a bad rap — it’s quite hard to find any media depiction of the practice that doesn’t paint it as outright predatory or at least ill-intentioned.
However, shorting plays an important role — beyond simply allowing investors to profit in a wider set of market conditions or hedge their positions, it also serves as a counterbalance against stocks whose valuation has gone out of line. While it might not seem like it at first, short selling acts as a corrective mechanism — one that challenges irrationality, reduces the odds of a speculative bubble forming, and aids in price discovery.
With that being said, there are a few practical considerations we should also mention. Short selling is not suitable for everyone — whereas going long can be done in a relatively passive manner, shorting stocks requires discipline, attention, and decisiveness — at all times.
Shorting a stock might seem like a daunting process at first glance — but with proper risk management and the right tools at your disposal, mastering it simply becomes a matter of practice.
We’ll get into more granular detail on certain subjects that you should be aware of later — for now, let’s present an outline of a typical short sale.
Let’s cap this part of the guide off with a hypothetical example.
In this scenario, you’ve been following a company for some time. However, it is exposed to some industry-wide challenges, has weaker fundamentals when compared to peers and rivals, and plenty of company insiders have been offloading shares.
Unsurprisingly, you deduce that there’s a high chance that following the company’s next earnings call, which will happen tomorrow, the stock’s price will drop — so decide to short the stock.
You first check that the stock can be borrowed — and ascertain that it can. Let’s say that the stock is trading at $100, and that you’ve borrowed 20 shares and set a profit target at $75. You sell them — and now you have $2,000.
That earnings call ends up being a disappointment, and the stock price falls from $100 to $75. With your profit target reached, you decide to close out the trade, purchase 20 shares for a total of $1,500, and return them to the lender, thereby pocketing $1,500, sans trading fees.
Several key features of TradeZero’s platform support fast decision-making, clean execution, and real-time access — all of which are crucial for successfully shorting volatile names in tight windows.
Through commission-free stock trading, active traders benefit from lower friction per trade, especially when scaling into a position or trimming risk during rapid moves. Commission savings can make a meaningful difference when executing high-volume strategies or managing thin margins.
So, what does commission-free stock trading mean, exactly? TradeZero doesn’t charge a base fee for standard limit orders on U.S. equities priced over $1 traded on NASDAQ, NYSE, and AMEX from 7am-8pm ET. That doesn’t mean that the trade is entirely free, however — certain regulatory costs, such as TAF, SEC, and NSCC fees still apply, although they’re quite minuscule.
Placing a market order comes with a $0.005 per share fee, with a minimum of $0.99. In addition, TradeZero users are charged a flat $0.99 fee for paid orders with fewer than $200 shares.
Moreover, TradeZero offers access to hard-to-borrow locates, which allow you to more frequently take advantage of some of the most tradeable short setups, such as speculative low floats and post-spike reversals.
In addition, traders get to benefit from Direct Market Access (DMA), which reduces slippage and improves execution time.
Lastly, the platform also provides full short-list availability and transparency. Users can view what’s shortable, what’s classified as hard-to-borrow, and what’s currently restricted — all updated in real time.
Each of these features supports active short sellers in terms of access, speed, and control, ensuring that traders are properly equipped to make the most of short-selling opportunities.
Before initiating a short position, traders must ensure the shares they want to short are available to borrow. This is known as the locate process. A locate is a confirmation from the broker that a share can be borrowed, either from a brokerage’s own inventory or through a network of third-party lenders.
Without first securing a locate, shorting isn’t allowed. This safeguard is part of Regulation SHO, a core SEC rule that prevents traders from selling shares they haven’t confirmed they can borrow.
Unfortunately, locating shares isn’t always straightforward. Stocks with high float and heavy liquidity are generally classified as easy-to-borrow and can be shorted with no extra steps.
Others, especially those that are volatile, thinly traded, or driven by news, fall into the hard-to-borrow category.
TradeZero simplifies this process through a built-in locate system that functions in real time. Instead of placing a request with a delay or waiting for a broker to respond, traders can see exactly what’s available from their platform.
On top of this, TradeZero’s locator scans a dozen venues, including its own supply, to ensure both the greatest degree of availability as well as optimal pricing.
In addition, traders can create a list of tickers they want to keep track of and receive real-time locate costs.
Beyond real-time locates, TradeZero also offers single-use locates, which are used specifically for Regulation SHO threshold securities, which tend to be harder to borrow. These are securities that have seen a large number of fails to deliver, and are temporarily under greater scrutiny from regulators in order to prevent instances of naked shorting.
As the name suggests, single-use locates cannot be reused — but this is mostly balanced out by the fact that they’re generally cheaper than other locates.
Short-selling strategies are quite diverse and can be utilized in a wide range of market environments. While the core processes and logic remain the same, the setups, timing, and logic behind different shot selling approaches can vary quite significantly.
With a general overview out of the way, let’s deal with some specifics, and take a look at 5 common strategies that short-sellers employ.
1. First Red Day
This strategy targets momentum stocks that have been running for multiple sessions and are starting to show signs of exhaustion. The “first red day” refers to the first session in which the stock closes lower than the previous day. It’s a psychological turning point—an early sign that the uptrend may be done.
Traders watch for weakness early in the session, fading any failed morning spike. Volume tapering off, slower higher lows, or intraday breakdowns through support levels often trigger entries. The key is to avoid guessing tops and instead wait for confirmation that momentum has cracked.
2. VWAP Fail
The Volume Weighted Average Price (VWAP) is a critical tool for short-term traders. Unlike a simple moving average, VWAP accounts for both price and volume, offering a more accurate read on the day’s true trading levels. It’s also the benchmark many institutional desks use for execution.
A VWAP fail happens when a stock is trading under VWAP, pushes up toward it, but gets rejected. That rejection—especially on lower volume or lower highs—signals weakness, as buyers can’t regain control.
The setup becomes even more reliable when confirmation shows up in the form of rejection candles, failed higher lows, or rising selling pressure after the VWAP rejection. Momentum typically shifts as a lower high forms, showing sellers are back in control.
Used properly, this setup offers a tight risk level (just above VWAP) and can deliver clean fades—especially when paired with direct market access tools that allow for faster entries and exits.
3. Gap and Crap
This setup targets stocks that gap up at the open due to press releases, speculative hype, or momentum chasing. While the gap may look bullish at first glance, these moves often lack follow-through. The key insight is that many of these spikes are driven by emotion and thin pre-market volume—factors that rarely sustain during regular trading hours.
Rather than shorting blindly into strength, experienced traders wait for signs of weakness. A failure to break above pre-market highs, a lower high forming after the open, or a breakdown of the morning support range are common entry signals. Timing is everything: jumping in too early can lead to a squeeze, while confirming weakness often offers a safer and more scalable entry.
Once momentum dries up and selling begins, these trades can unwind quickly—especially in small caps or low-float names. As the gap fills and early longs start exiting, the result is often a sharp fade that rewards patience and discipline.
4. Overextended Parabolic Reversal
Some stocks climb rapidly over multiple sessions, often without any consolidation or pullback. These parabolic moves are typically fueled by hype, short squeezes, or momentum traders chasing breakouts. Eventually, the move becomes overextended—volume thins out, range expands, and buyers start hesitating.
That’s when short sellers start preparing for a reversal. Common entry triggers include failed breakouts at key resistance levels, bearish engulfing candles on the daily chart, or momentum divergence where price makes new highs but indicators like the relative strength indicator (RSI) or moving average convergence/divergence (MACD) begin to roll over. Lower timeframes often show cracks first, with a breakdown in trendline support or a loss of higher lows.
Because the move is so stretched, reversals can be aggressive—especially once the first wave of profit-taking hits. The danger lies in entering too early. Parabolics can always push higher before breaking. But once the reversal starts and supply overtakes demand, the unwind can offer both speed and range.
5. Pre-market Fade
Some stocks experience aggressive spikes during pre-market hours, typically on news, filings, or social media-driven catalysts. These moves can be exaggerated due to low liquidity and lack of institutional participation. Often, the same catalysts that generate the initial move fail to hold up once the regular session begins.
When volume begins to fade and the stock struggles to break through key resistance levels—especially near pre-market highs—traders may look for short entries. A failed retest or consistent lower highs heading into the open often signal that buyers are losing interest. It becomes a matter of anticipating a weak open and capturing the downside move as liquidity returns.
Pre-market short setups require extra caution due to thin order books, wider spreads, and less predictable price action. But for traders who can read early momentum shifts and execute with precision, the pre-market fade offers a solid window to exploit unsustainable early strength—particularly with the help of fast routing and access to short locates.
The fee structure associated with short selling functions quite differently from your run-of-the-mill long position.
Timing is everything in short selling. Knowing when to press a short setup can be the difference between catching a clean move and getting caught in a reversal and exposing yourself to some significant losses.
Despite its mostly unwarranted bad reputation, short selling is a perfectly legal and legitimate practice in the United States and most major markets — provided that it is done in compliance with regulatory frameworks.
Most of that bad reputation we’ve mentioned a few times now dates to times before the great financial crisis of 2008. To be more precise, 2005 is a major turning point, as it saw the introduction of SEC Regulation SHO.
This piece of regulation was aimed at curtailing naked shorting — an illegal practice where traders engaged in short selling without actually having borrowed shares. Naked shorting produced a lot of failures to deliver, bogged down clearing processes, and was leveraged to put undue selling pressure on equities — in other words, it made markets less efficient, and could even be used as a tool for market manipulation.
SEC Regulation SHO introduced locate requirements and close-out requirements. The former guarantees that traders and brokers have to ascertain that a stock can be borrowed before a short sale happens. The latter obligates brokerages to purchase shares on the open market and deliver them to buyers in the event that a failure to deliver does occur.
Lastly, SEC Regulation SHO was revised after 2008, bringing about even stricter requirements aimed at curtailing abuse and maintaining market efficiency.
Short selling is legal in most developed financial markets — with that being said, the exact rules and regulations that govern it vary from jurisdiction to jurisdiction.
Traders in the United States, Canada, Australia, and the United Kingdom, for instance, are free to engage in short selling. In contrast, however, regulatory bodies in plenty of developed economies have been known to impose temporary bans on short seling or stringent measures which severely curtail how viable it is.
For instance, South Korea introduced a temporary ban in November of 2023 — which was only lifted on March 31, 2025. China has had numerous instances where it has banned shorting, usually as a response to highly volatile markets — and the same holds true for Greece, Turkey, Malaysia, and many other countries. In addition, regulatory bodies in the Eurozone are allowed to ban the shorting of specific equities (or shorting altogether) during periods of high volatility.
TradeZero operates within markets that uphold transparent, regulated short-selling practices. By focusing on jurisdictions that prioritize investor protection and operational clarity, the platform ensures its users can access short-selling tools without facing unexpected compliance barriers. For traders who need consistency and trust in the regulatory backdrop, operating in countries that permit legal, structured shorting is not just helpful—it’s essential. TradeZero's infrastructure is designed to align with these standards, giving trade
Short selling plays a significant role in market activity, often making up a sizable portion of daily trading volume. While the exact percentage fluctuates depending on market conditions,data from NASDAQ suggest that a typical stock has around 40% to 50% of its daily trading volume sold short.
When evaluating a potential setup, one key metric traders utilize is short float. This is the percentage of a company’s publicly available shares, or float, that have been sold short.
Stocks with a short float of 20% or more are considered to be heavily shorted. While this is a reliable indicator that a significant degree of bearish sentiment is present, it also carries risks — as high short float is one of the conditions necessary for a short squeeze to occur.
In some of the most high-profile short squeezes in recent times, such GameStop and AMC, short float exceeded 100% at its peak, meaning more shares had been shorted than were actually available to trade.
While it is arguably the most straightforward method, short selling is not the only way by which a trader can profit from a decline in an asset’s price.
Depending on your preferred risk tolerance, some of these other options can be equally as valid — if not preferable, to short selling.
Utilizing derivatives — options contracts, to be precise, is the most common alternative. Traders can construct a synthetic short position by buying a put and simultaneously selling a call at the same strike price and expiration. If the stock declines, the value of the long put increases while the short call adds further downside exposure
For traders in search of an even simpler approach, buying put options is another possibility — in addition, as this method has a defined risk, limited to the premium that is paid to purchase the options contract, it is generally both simpler to execute and requires less risk management when compared to short selling.
On the other hand, traders who prefer something more passive can utilize inverse exchange-traded funds (ETFs). These funds are designed to move in the opposite direction of a certain index or sector — so when that index or sector falls, the ETF rises.
Lastly, traders can utilize bear put spreads to profit from a decrease in an asset’s price. This options trading strategy works by buying a put at one strike price and selling a put at a lower strike price. This results in a scenario where both risk and reward are limited.
Retail traders generally dominate trading volume — and the same holds for short selling. Institutions such as hedge funds, banks, and asset managers can leverage deep capital reserves, complicated risk modeling, significant access to leverage, and veritable armies of analysts to conduct short selling on a scale that is hard to imagine for the regular retail investor.
While exact data is rather hard to come by, a 2016 research paper by Eric K. Kelley, professor of Finance at the University of Tennessee, and Paul C. Tetlock, a professor of Finance and Economics at the Columbia Business School, suggests that fewer than 2% of short sale order on the New York Stock Exchange (NYSE) come from retail investors (page 3, citation 1).
With that being said, retail short selling has seen meaningful growth as of late, with the wider expansion and mainstream appeal of retail investing coupled with the advent of widespread commission-free trading as key catalysts. At present, retail short sellers tend to focus on high-volatility, low float stocks.
Moreover, the gap in terms of tools has narrowed. With platforms like TradeZero, retail traders can now monitor hard-to-borrow availability, secure real-time locates, and execute trades with low latency and direct market access.
Short selling comes with a unique set of risks — and retail traders should be fully aware of this risks, as well as how to manage them, before opening a position.
For one, short selling comes with the potential for unlimited losses. Once you have negative exposure to an asset, since there’s no limit on how far prices can rise (hypothetically, at least), there’s no limit to your potential downside. Thankfully, by leveraging TradeZero’s support for complex order types and using stop loss orders or stop limit orders, traders can reduce the risk of large losses.
In addition, traders have to keep an eye out for a potential margin call and liquidation risks. Since short selling is always done with a margin account, traders have to maintain a minimum level of equity. If the value of your account goes below this level, you’ll have to deposit more funds or liquidate some of your open positions.
If you don’t do that (or for some reason, can’t), then your brokerage is allowed to liquidate some of your positions in order to bring the value of your account above maintenance margin requirements. This means that positions which are currently at a loss will result in locked-in losses — and positions that haven’t had time to play out fully will likely provide smaller profits than they could have.
Then, there is the risk of a short squeeze to consider. Although relatively rare, short squeezes can quickly cause huge losses. In a short squeeze, a highly-shorted asset sees a rapid increase in price. This leads to numerous traders having to buy to cover — driving prices even higher up, which causes even more buying to cover.
Moreover, the Short Sale Rule (SSR) can be triggered when a stock drops 10 percent or more in a single day. Once in effect, the SSR restricts shorting on downticks for the rest of that session and the next trading day. This limits flexibility and can alter execution plans, especially for day traders who rely on momentum breakdowns to time entries.
Lastly, short bans, disclosure rules, and locate enforcement can shift in response to market pressure or political intervention. Traders need to stay informed and adapt quickly when the rules change.
The most apparent benefit of short selling is that allows traders to profit from a much wider variety of market conditions. Through the judicious use of shorting, bear markets, downturns, and corrections can become opportunities for active trading instead of just something you have to wait out.
Simply put, there’s a much wider variety of setups that traders can take advantage off — like shorting an overvalued stock or opening a position once momentum has faded.
In addition, even traders who don’t necessarily want to profit from decreases in an asset’s price can benefit from shorting, as it can be used to hedge long position and reduce overall risk.
Shorting is a complex, often misunderstood approach to trading. However, traders who take the time to inform themselves and select the right tools for the job can leverage this approach to unlock profits in bearish markets, hedge their long positions and reduce portfolio risk, and take advantage of numerous trading setups.
By offering a variety of features catered toward short sellers, such as real-time locates, direct market access, and a paper trading account TradeZero gives traders the flexibility to engage with short setups on their own terms.
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Trading securities can involve high risk and potential loss of funds. Furthermore, trading on margin is for experienced investors and traders only as the amount you may lose can be greater than your initial investment. Likewise, short selling as a securities trading strategy is extremely risky and can lead to potentially unlimited losses. Options trading is not suitable for all investors as it can involve risk that may expose investors to significant losses. Please read the Characteristics and Risks of Standardized Options, also known as the options disclosure document (ODD) at OCC before deciding to engage in options trading.
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