Most investors would capitalise on their strengths rather than their weaknesses. If you translate this in the true sense, they are focusing more on strategies that would boost their chances of making profits. But they also have specific risk management techniques, which normally depend on the given market.
For instance, in cryptocurrency, these players often deal with bullish and bearish episodes in unique ways. Some increase their profit margins, while others have lost substantial money.
What’s the reason behind the different outcomes? Strategies! Veteran investors and traders have become more adept at handling the ups and downs of the crypto market over the years. One of the powerful strategies that are common among these people is short-selling.
How does it work? Very simple: you buy the cryptocurrency at a high price and then buy it back at a lower price. Meaning to say, you can profit from any market condition if this strategy is applied properly.
But don’t assume that you know everything yet. The following facts would give you a clearer perspective on how to use short selling to your best advantage. However, even if you truly grasp the concept of short selling, you can never succeed in crypto trading if you fail to choose a dependable trading platform. Now, we know some of them might be luring you with some hefty deals but always try to choose some of the apps like Coinbase, Binance and Bitcoin Loophole. We can guarantee they have already been tested.
Overview of Short-Selling in the Financial Market
Short selling requires a skill that capitalizes on the dynamics of when a market shifts from higher to lower prices. But many traders and investors are intimidated due to the steep learning curve, resulting in the avoidance of the strategy even in bear markets. However, this classic strategy can be applied in both uptrends and downtrends as long as proper management rules are followed and timing is carefully managed.
If you’re planning to try this strategy as a crypto trader, remember that short selling mastery needs basic entry strategies, defensive trade management, and perfect timing.
As a seller, you also need to adopt rules that can improve your strategies while lowering the risk of getting caught in an unfavourable position. Although it’s not a fool-proof approach to avoiding substantial losses, it can be very helpful in reducing certain risks.
Common Short Sale Strategies
Short selling can be executed at any time in a liquid market with no special restrictions. Theoretically, having security in inventory when another player takes a short position is necessary. But in reality, it’s a widespread practice to have naked short sales without corresponding inventory as the business is becoming more competitive. Some of the most common techniques for profitable short sales include the following:
- Selling a pullback in a downtrend.
- Entering within a specific trading range and waiting for a breakdown
- Selling assets into an active decline
Some traders may also sell short at new highs, assuming that an asset or security has risen too far. Without them knowing, this can cause a disaster because uptrends may persist longer than predicted by fundamental and technical analysis predicted.
Dos and Don’ts in Short Sales
Interestingly, short sale performance can be improved with certain strategies below that reduce the risks while focusing on the most promising opportunities. Keep in mind that going after lows in a momentum strategy should be strictly avoided until you develop a proven skill validated by bottom-line profit and loss.
- Short the Weakest Assets, Not the Strongest
While other traders may stare at significant uptrends, thinking that the security is too high, you can identify the weak market groups in the process. These assets may have been engaged in downtrends, and you can use countertrend bounces to get on board. Such issues usually carry lower short interest than a typical hot stock, making them less vulnerable to unfavourable market conditions.
- Short Rallies, Not Sell-Offs
As a short-seller, you must avoid the crowd as much as possible. You can use market sentiment to get positioned at the best possible price. Remember that countertrend bounces provide ideal conditions for selling short because you know the price where other participants are likely to reload their positions. The risk may arise if the crowd is bigger than those buying the broken assets, hoping for a new uptrend.
- Defend Against Failed Breakdowns
Emerging downtrends can be put on the test relentlessly. That’s why knowing your cover price when a downtrend returns to the breakdown level and placing a stop is very important. There’s usually a minimal advantage in taking a loss after the position has moved into a profit; hence the stop should move higher than the breakeven price.
Final Thoughts
Short-selling can be a powerful strategy for cryptocurrency trading. It can be used during bull and bear runs in the market. You can boost your chances of generating profits while reducing certain risks when executed properly.