2026 Guide To Short Selling With TradeZero

Important: This article is for educational purposes only and is not intended as investment, tax, legal, or trading advice. Nothing here is a recommendation or solicitation to buy or sell any security, or to use any of the short selling strategies described. Short selling, margin trading, and options involve a high level of risk, including the potential for losses greater than your initial investment. Before trading, you should carefully consider your objectives, experience, and risk tolerance, and if needed, consult with a qualified financial professional.

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, 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.

• Step 1 — Borrow Shares
  
  To initiate a short sale, a trader first has to borrow shares to sell. These shares are usually sourced from your brokerage of choice - and allocated to you either from the brokerage’s inventory or another investor’s margin account. You’ll also have to use a margin account of your own for short selling.
  
  You don’t take physical possession of the shares - you’re simply authorised to sell them temporarily, with the obligation to return them later. Not all stocks can be borrowed for the purpose of short selling - but TradeZero provides a simple, readable overview of both easy-to-borrow and hard-to-borrow equities.

• Step 2 — Sell the shares you’ve borrowed
  
  Once you’ve successfully borrowed shares, it’s time to sell them. You can opt to sell them at the current market price, but you don’t have to - as you can utilize complex order types such as limit order to secure a specific entry point. With that said, borrowing a stock comes with fees, which are calculated daily - so it’s best to time borrowing and selling as close as possible to one another.
  
  With the shares sold, you now have negative exposure to the stock, and will profit from a decline in its price.

• Step 3 — Monitor the trade and prepare to close it out
  
  As you most likely know, stock prices fluctuate - and those changes can be rapid, hard to predict, and significant.Before you short a stock, you should have a clear price target in mind.
  
  While it’s always tempting to hold for longer to see if you can secure a larger profit, opting to stick to a plan allows you to enjoy more consistent gains as well as optimize your strategy without taking on undue risk.
  
  Once your profit target has been reached, it’s time to cover your short position. This is the part of the process where you purchase the exact amount of shares that you sold short, so that you can return them to the lender.

• Step 4 — Close out your short position
  
  Once the position is covered, the trader returns the borrowed shares to the broker, and the trade is brought to a conclusion. The difference between the sale and buyback price is the realized profit, excluding any fees.
  
  TradeZero supports this flow through a platform designed for real-time short execution. Traders can locate, sell, monitor, and cover seamlessly - all without leaving the interface - making it easier to act on short setups as they emerge.

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.

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.

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.

Short Locates are a key tool for Short Selling. Stocks can be, at times, difficult to borrow. Maybe they’re in very low liquidity and there’s a sudden surge in demand for them, your entire short selling strategy hinges on being able to locate or borrow the right stock at the right time.

You are required to locate or borrow place a short sale. For short sellers, it can be the difference between acting on an opportunity or missing it entirely. TradeZero has a three different types different locates - each for a particular scenario. Locates also come with costs, so managing them wisely helps protect your profit potential.

Standard locates allow traders to enter and exit multiple positions in the same stock throughout
the day, assuming the stock is not on a regulatory threshold list.

Single-use locates are designed for threshold securities and permit one short and one cover per trading session. These are often cheaper and automatically offered when applicable

Pre-borrows are required for Reg SHO threshold securities and are ideal for traders expecting to hold short positions overnight or who plan to trade the same ticker repeatedly. These come at a premium but offer more flexibility.

Traders can also mark unused locates for potential credit. If another user takes over the locate, the original trader may receive a partial refund - an added layer of cost control.

Altogether, the system gives short sellers transparency, speed, and choice - critical
advantages when timing matters.

Learn more about Short Locates in our expert guide: How to use Short Locates when Shorting Stock

You’ve spotted a potentially excellent shorting opportunity, but you can’t find the shares to execute your strategy - that’s where hard-to-borrow (HTB) stocks and threshold securities come in. These are shares your broker may not have readily available for shorting, often because they’re thinly traded, volatile, or in high demand.

For short sellers, HTB stocks and threshold securities present a challenge: you’ll need to secure a single use locate or a pre-borrow before short selling either. Unfortunately, the fees for locates and pre-borrows can quickly cut into profits. Understanding how HTB locates work helps traders manage costs and avoid the frustration of missed opportunities. Read our guide on hard-to-borrow stocks in short selling.

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.

• Event-driven shorting
  
  In event-driven shorting, traders seek to take advantage of catalysts, usually negative media coverage or disappointing earnings calls. Events like these can cause a sharp move to the downside and offer a convenient setup.
  
  However, there’s always a degree of risk involved, as the news cycle is rarely predictable - and timing is of the essence with this approach, so you’ll have to move quick.

• Technical setups
  
  Traders often turn to technical analysis - analyzing price action, in order to identify short-selling opportunities.
  
  A stock that has failed to breach a key resistance level will most likely see a move to the downside, thereby presenting an opportunity for shorting. The same holds true if a breakdown from a trendline occurs or if a bearish stock chart pattern is printed. Moreover, traders sometimes enter positions even earlier - for example, if volume starts weakening, hinting that a rally could soon end.

• Overbought or parabolic fades
  
  When a stock goes vertical on hype or momentum, experienced short sellers look for signs that the move has exhausted itself. These setups are high risk and fast-moving. The aim is to catch the turn when enthusiasm peaks and buyers begin to dry up.
  
  Entering too early can lead to a painful squeeze, while entering too late means the edge is already gone. These plays often involve small-cap or low-float names that have jumped on news, speculation, or viral attention.

• Pairs trading
  
  This involves going long one stock while shorting another within the same industry or sector. The idea is to profit from the performance gap between the two, regardless of what the broader market does.
  
  There are two distinct ways to approach pairs trading. The first, simpler way is to go long on the asset you believe is fundamentally stronger, while shorting the weaker one.
  
  However, some traders prefer to wait for a divergence. This involves identifying two stocks that trade in tandem with each other - when one rises, the other does as well - and waiting for a time when that general rule is broken.
  
  This is most often caused by specific bearish catalysts - but if the correlation is strong enough, those negative events usually end up being little more than a short-term dip.
  
  The idea with the second approach is to buy the stock that has seen a price decrease, expecting it to rise, while you short the one that has continued to rise. In essence, this is a bet that a reversal to the mean will occur.

• Sector or Market Hedging
  
  Finally, there’s the broader use of short selling for hedging.
  
  In uncertain macro environments or volatile sectors, traders might short index ETFs, sectors, or highly correlated names to reduce exposure.
  
  This is less about targeting a specific ticker and more about managing risk at the portfolio level. When long positions are vulnerable, short exposure can act as a buffer, softening the blow from market-wide downturns.

• Head and Shoulders Pattern: One of the most widely used bearish reversal setups is the head and shoulders pattern. This formation signals a potential shift from an uptrend to a downtrend, giving traders an opportunity to position themselves for declining prices. By identifying the left shoulder, head, and right shoulder structure, traders can anticipate when momentum may break down, especially once the neckline support is breached. When used correctly it can be a powerful indicator. To explore this setup in greater depth, read the full article: head and shoulders pattern for short selling.
  
  
• The Inverse Head and Shoulders Pattern: Just as the head and shoulders is a staple bearish setup, the inverse head and shoulders pattern is one of the most widely followed bullish reversal signals. Instead of pointing to weakness, this formation suggests that downward momentum may be bottoming out and a potential uptrend could be forming. By spotting the inverted left shoulder, head, and right shoulder, traders can anticipate when buying pressure might return as the neckline is broken to the upside. For a deeper look at how this pattern plays out in practice, see our guide to the inverse head and shoulders pattern in trading.

• Rising Wedge Pattern: The rising wedge pattern is one of the most widely used bearish continuation and reversal signals in technical analysis, making it a valuable setup for short sellers. This formation develops when price action climbs within converging trendlines, revealing that upward momentum is losing strength even as prices push higher. Traders often view the eventual break of support as a key trigger for short entries, since it can precede sharp reversals. To learn how to identify and trade this pattern, read our detailed guide, rising wedge pattern for short selling.

• Falling Wedge Pattern: The falling wedge pattern shows up when prices drift lower on shrinking volume and volatility. For short sellers, it’s usually not a place to open new positions because the downside is limited. But if you’re already short, the wedge can be a welcome signal: it often means the sell-off is losing steam, so it’s time to plan your exit before a rebound. Active traders also track falling wedge breakouts as signs that demand may soon take over, resulting in an upward price projection. Learn more in our guide to the falling wedge pattern tactical guide.

• Double Top Pattern: You’re watching a stock climb, but then it fails to break through the same resistance level twice. That’s the double top pattern, one of the most common signals of a potential reversal. It forms when price rallies to a peak, pulls back, and then rises again to the same level only to stall. When support breaks after the second peak, many traders see it as confirmation that bullish momentum has run out. For short sellers, the double top can provide a clear entry point and a defined risk level. The pattern’s simplicity makes it popular among technical traders, especially in volatile markets where reversals can move quickly. Learn more about the Double Top Pattern in Short Selling.

• Short Float: You spot a stock with heavy shorting interest, but you need to know if the pressure is building or if a snapback rally is looming. That’s where the short float comes in. Short float measures the percentage of a company’s shares that have been sold short compared to the total shares available for trading. For short sellers, this number matters because a high short float means crowded positioning. That can amplify downside moves, but it also raises the risk of a short squeeze if buyers rush in. Understanding short float helps traders judge market pressure, gauge risk, and decide whether a setup is worth taking. Learn more about the Short Float including how to use it effectively by reading our guide on Short Float and Short Selling.

• Short Sale Volume: You see a stock trading heavily, but how much of that activity is driven by short sellers? That’s what short sale volume reveals. It tracks the proportion of total trading volume that comes from short sales. Unlike short interest, which shows how many shares remain short at the end of a reporting period, short sale volume updates daily and offers a more immediate read on short-side activity. For traders, this data helps separate normal trading from pressure created by shorts. A spike in short sale volume can mean increased conviction that a stock will drop, while declining short sale volume may signal that bearish momentum is easing. Knowing how to interpret these shifts gives short sellers a better handle on timing and risk. Learn more by reading our guide on why Short Sale Volume is a key indicator in Short Selling.

• Short Interest: You want to know how many traders are betting against a stock at any given time - well that’s exactly what short interest measures. Short Interest shows the total number of shares that have been sold short but not yet covered or closed out. Reported on a regular basis, short interest is a widely watched indicator of overall bearish sentiment in a stock. For short sellers, this figure matters because it reveals how crowded a trade may be. High short interest can signal strong conviction, but it also raises the risk of a short squeeze if buyers force shorts to cover. Unlike short float, which looks at short interest as a percentage of tradable shares, or short sale volume, which updates daily to show real-time activity, short interest offers a broader snapshot of market positioning. Learn more about this key indicator by reading our guide on Understanding Short Interest in Short Selling.

• Short Ratio: You want to know how much pressure short sellers are under in a stock. The short ratio gives you that answer. It compares the number of shares sold short to the stock’s average daily trading volume. The result shows how many days it would take, on average, for all shorts to cover their positions based on normal trading activity.For short sellers, this metric highlights both opportunity and risk. A high short ratio suggests that covering could take several days, which means squeezes can be violent if buyers step in. A low short ratio indicates shorts can exit quickly, reducing the chance of a squeeze but also the potential payoff from crowding. Learn how to use it by reading our guide on Short Ratio in Short Selling.

• Days to Cover: You want to know how long it might take for all short sellers in a stock to unwind their positions. That’s exactly what days to cover measures. It takes the total short interest and divides it by the stock’s average daily trading volume, giving traders a simple estimate of how many trading days it would take for shorts to buy back shares. For short sellers, this number is critical for judging risk. A high days-to-cover ratio means that if the stock starts to rise, shorts could struggle to exit quickly, increasing the chance of a squeeze. A low ratio signals less risk of crowding and faster exits. While it looks similar to the short ratio, the focus is different: days to cover highlights time-based pressure on shorts, whereas the short ratio emphasizes the relationship between short interest and volume as a measure of sentiment. Learn more by reading our guide on Days to Cover in Short Selling.

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.

• Borrow and locate fees
  
  Whether you’ve borrowed a hard-to-borrow stock or one that is easy to borrow, once the short position is active, a borrow fee (also known as a borrow rate) applies for as long as the position is held. This daily fee is calculated as an annualized percentage of the short’s dollar value and accrues until the position is closed.
  
  However, for traders who are shorting hard-to-borrow stocks, there’s an additional expense that must be kept in mind - the locate fee. Charged as a one-time expense calculated on a per-share basis, locate fees are paid upfront, and usually aren’t refundable, even if you wind up not going through with the trade.

• Margin interest
  
  To take part in short selling, traders have to use a margin account - and that entails paying an interest on borrowed funds. The final cost will depend on the size of the positions you open, the exact securities you sell short, and the terms of your brokerage, as well as the prevailing interest rate environment.

• Trading fees, routing costs, and opportunity cost
  
  On TradeZero, platform-related costs may apply depending on how the trade is routed.
  
  Finally, there’s the opportunity cost of capital. Every dollar used in a short position is capital that isn’t available for other trades.
  
  While the same holds true for any trade, this becomes especially relevant in fast-moving markets, where a lack of access to readily available capital can lead to missed opportunities. If a short trade ties up margin and fails to deliver, the real cost isn’t just the loss on the position - it’s also the inability to pursue more favorable setups elsewhere.

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.

• When the market is in a downturn
  
  One of the clearest signals for short setups appears during broader market downturns or corrections.
  
  When indexes begin rolling over or when hitherto bullish sentiment shifts decisively, shorting becomes a way to align with the prevailing trend. During these phases, weakness across sectors tends to amplify the momentum behind individual short trades, offering traders more follow-through and cleaner exits.

• When a stock has weak fundamentals
  
  A company that consistently misses earnings, lowers guidance, or loses key revenue drivers often sees investor confidence fade. Sometimes, the effect is rather rapid - in other instances, analysts will begin downgrading the stock and lowering the price targets.
  
  There’s no one-size-fits-all approach here - the reversal can happen all at once, or over the course of several quarters.
  
  Highly speculative stocks and those that are trading at extremely high valuations are prime targets - however, this is still far from a guarantee, as traders will have to correctly time movements to the downside to minimize trading costs.

• When technical analysis identifies an opportunity
  
  Analyzing price action can also showcase attractive entry points for short positions.
  
  From a technical standpoint, overbought conditions can be a reliable entry for short sellers who know what to look for.
  
  Extended rallies, especially those unsupported by volume or news, often stall out at key resistance levels. When those levels hold and reversal patterns begin to form - like lower highs or failed breakouts, opening a short position becomes a sensible choice.

• Irrational price action, Hype, and FOMO
  
  The market does not always behave rationally. Sharp spikes in price from news coverage, viral momentum, all sprinkled with a fair dash of hype and the fear of missing out (FOMO) on gains - and suddenly, we’ve got price action that isn’t rooted in reality all of a sudden.
  
  However, while initiating a short sale once such events occur is generally a wise move, it’s also a question of delicate timing. Move too early, and you’re at risk of a continued rise.
  
  No matter which conditions led you to the decision to open a short position, the speed of execution always plays a crucial role. Some of the best short trades often unfold in minutes, not hours. TradeZero’s low-latency infrastructure helps traders react in real time, secure borrows easily, and execute with confidence when an opportunity arises.

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.

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, and a paper trading account TradeZero gives traders the flexibility to engage with short setups on their own terms.

This content (“Content”) is produced by Tokenist Media LLC. The Content represents only the views and opinions of Tokenist Media LLC.Tokenist Media LLC’s trading experiences and accomplishments are unique, and your trading results may vary substantially. Tokenist Media LLC is a paid marketing partner of TradeZero that receives compensation from TradeZero for broadcasting, displaying, and/or presenting marketing and sponsorship materials that promote TradeZero. TradeZero does not endorse the Content and makes no representations or warranties with respect to the accuracy of the Content or information available through any referenced or linked third party sites. The Content has been made available for informational and educational purposes only and should not be considered trading or investment advice or a recommendation as to any security.

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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