What's up everyone? Ross here from Warrior Training and I'm going to talk to you today about short selling, what it is, how it works, what you need to know about it, and some of the risks associated with short sell? I'm also going to show you a live example of me taking a short position and making about four hundred dollars, which is pretty cool. So we're gonna start this episode out here on the whiteboard and then we're gonna go into my office and get on the computer and I'll actually show you taking trades to the short side. So first of all, let's talk about what short selling is. Now traditionally when you think about the stock market, most people think about buying the stock and you know price down.

here. let's say $40 a share and the stock goes up to $80 a share and you make a profit. But what about when the stock goes down back to 40? Well most people would just think that if you were holding here from 80 down to 40, you would lose money. and of course traditionally you would.

But what if you go ahead and you sell - 1000 shares up here at $80 and then you buy back those shares you buy back plus 1000. at 40, you'll actually profit on the way down, just as you would have profited right here by buying a thousand shares and selling it at the top. You can then go ahead and sell and create a negative position that you then have to cover by buying shares down here at the bottom. Now, something that's really interesting about short selling is that whether or not you can sell to the short side and take a short position on stock is going to be dependent on your broker.

Your broker has to have an inventory of the stock in order to let you borrow the shares. And so basically there are gonna be some brokers that are really great for short selling and some brokers that are not so great just simply because they don't keep a large inventory of all these shares to borrow. And what's also interesting is that as a stock is moving up higher and higher and higher and higher, the availability of shares that the broker has will start to decrease. So initially at the beginning of a day or a month, let's say they have a hundred thousand shares available for people to sell to the short side.

Well as the stock goes up and more and more people start to recognize that it's extended and likely to reverse. More people will start shorting it and that inventory will go down from a hundred to 90 to 80 to 70, 60, 50, 40, 30, 10 and then zero. And then the stock becomes hard to borrow. So when you're trading a stock in your order entry window, typically it looks something like this so you'll type in the stock so a a PL for instant and then you'll be able to.

You'll see over here in the corner you usually see something. they'll say e which means the stock is easy to bar. Sometimes a broker will call it an E T be easy to borrow and then once the stock is getting very low on inventory, it'll often say L for locate. And that means if you call your broker, you might be able to call them on the phone and they might be able to find shares for you too.

Sure, but it's no guarantee. And then you'll get to a point where it says t and that means there are simply no shares available. It's not option, can't do it. So these are the three different messages that you'll sometimes see on your order entry window and that'll let you know whether or not your broker has an inventory of shares of a little bar.

Now, people who are really aggressive on trading to the short side. they'll often have brokerage accounts with several different brokers. That way, they've kind of covered their bases. and if one broker doesn't have shares of their available to borrow, then another one might.

Of course, the challenge as a beginner trader is that it's not always cost-effective or even affordable to open multiple brokerage accounts. And so for that reason, I don't think that short selling is really a beginner's trading strategy. The other thing that is important to know is that when you short a stock, let's say we short the stock at 80. What happens if the stock goes up to ninety or goes up to 100 or 120 or 150? Well, your position here too short.

A thousand shares at 80 is an $80,000 position. But as the stock goes up, it's now a hundred thousand position. and now it's 120. And now it's a hundred and fifty.

And what if this stock goes up to? let's say, a thousand dollars a share? You're losing potentially an infinite amount of money. I Mean the Sky is the limit. Now you don't see stocks that go to from 80 to $100,000 overnight, but they can go from 80 to 100 to 160 or maybe 200 in a matter of weeks or months. And potentially you could lose a lot of money.

Where is over here when you bought a thousand shares of this stock at $40 How much money did you have in it? Forty Thousand dollars? All right. So the worst case scenario is that the stock went to zero and you lost what you put in. So when you trade to the long side, you buy stocks. Your worst case scenario: you're max risk is the money you put in.

But when you short a stock, your max risk, technically speaking, is infinite. Now, because you have an infinite amount of risk, brokers will not let you short stocks with a cash account. They require you to sign a margin agreement and trade in a margin account. A margin account means that if you lose more money than the balance of your account, you owe it back to your broker.

All right. So for that reason, again, short selling. Not really a strategy for most beginner traders. Number one, you need to sign a margin agreement which means you need to get approved for margin sometimes that requires certain employment experience or an income requirements certain credit checks.

Number two, you have potentially an infinite loss even if you do have the margin approval. and number three, you need to search around for the brokers that have the largest availability of shares to borrow or though are the largest inventory. Often, those brokers that have the highest inventory also have high minimum account balances, which means opening an account may require a minimum of $50,000 And of course that's gonna price out all the beginner traders. So I generally would look at Shark selling is more of an advanced strategy and a strategy more suitable for beginner traders would be one that I'll have a link to right in my description below which will be a momentum strategy trading to the long side where I would go ahead and buy a stock just like this with a max loss at let's say $38 So with a thousand shares, I'd be risking $2,000 and my profit target would be forty four to forty five.

Which would mean I'd be making between four and five thousand dollars for a two to one profit - loss ratio. Now why don't we go into my office and actually look at me taking the short position so you can see what it looks like to execute that position to have a negative position in your open positions window and then to cover it for problem. All right. So I'm going to show you guys a real example of me taking a short position which I took yesterday and made about $400 shorting a stock.

But before I do I'm going to show you in this trading simulator what it looks like to take a position to the short side. So I'm gonna type in this stock right here. A GTC the stock is it $8.67 and so I'm gonna type 65 and I'm gonna press the short button right here. and just like that, I'm now negative 3000 shares.

All right. So I am short the stock and I'm short at 66. Now if the stock drops down to 850 or you know, 845 I will make money you can see right now. Okay, it's at 63 so at 64 cents, I'm making a little bit of money now.

if it pops up here, I'm gonna lose money. and potentially if it breaks over $9 and squeezes, this stock could go quite a bit higher. So let's see what it does I can move my order up at let's see I'm gonna put it up around 9 to get out Now in order to get out of a short position I have to press the Buy button I have to buy shares. All right? So I'm gonna go ahead and cover.

I'll try to cover a little bit into this dip. so I'll type in 1,500 shares. I'm gonna cancel that order. Put it at 55.

Seems like it's kind of stair stepping down here a little bit and you can see on this trade. My realize profit unrealized right now is $150 that's you know, $30 It kind of fluctuates as the trade as the stock is moving up and down. So with this negative balance of 3000 shares, I've borrowed these shares from my broker. Now this is obviously a trading simulator, so it's not a real borrow.

But if I had borrowed them in real life from my broker, my broker would eventually want me to buy back the shares that I had sold and they're only gonna let me borrow them for so long. There's a limited number of time, a limited period of time that a broker will let you hold a stock to the short side because you are borrowing the shares and no one else can short it while you have them borrowed. So during this period of time, I've got the stock tied up to the short side and obviously right here on this type of setup. I'd be hoping that it breaks below a 50 or something like that.

maybe drops down into the 8 40s. so maybe I put an order to cover 750 shares down here at 8:48 Something that is also important for you guys to know is something called short sale restriction. The market has a short sale restriction and what a short sale restriction means is you cannot short the stock by selling the shares at the bid price. This is the bid on the left and this is the Ask on the right.

So in this case I can go ahead and I can I can cancel user I can press short right here on the bid and I'm getting filled right away. But during a short sale restriction, I can only short by putting my shares on the ask. So let me put my shares at 69 and press short. What you can see is that my order is just gonna sit here until the stock pops up and it's also sometimes called the uptick rule because you won't get filled until the stock ticks up like it just did right there.

and usually when a stock is going up is not what you want to be getting filled. This right here is a perfect example of me starting to get squeezed on the trade. It's I'm short at 66 and now the stock is moving up and if it breaks over 9, look at how quickly I'm going into the red now. of course just as easily you could be going into the green if you had been long at that same position and this actually was a fairly bullish pattern.

we'll see what it ends up doing. But what's important to also recognize is that if I put my entire account into that trade at 66 as the stock is going up, it's gonna cost more money to buy the shares because I've got to buy to cover. So I'm gonna buy 4,500 shares and buying 45 hundred shares cost more at 870 and then it does it 860. So if I put my entire account into the trade open here, looks like we're getting a little false breakout, so let's put that order down here to cover a little bit.

We'll see if it breaks below the half dollar. If it breaks the half dollar, maybe I'll do 1,500 shares. See if we get that false breakout and that flush might end up fading back down towards $8 All right. So there we go.

so you know all's well. that ends well on this one I guess. But it still goes to show that these can squeeze the wrong way. and when you're short and they're squeezing the wrong way, it's costing more and more money to buy back the shares.

And that means you could get into a situation where you're gonna have what's called a margin call on your account and a margin call is when you basically your account has gone into the negative. All right. So that was a little example of a short sell selling the stock short getting squeezed as it was going up and then covering for a profit as it came back down. Let's look at an example of this in practice yesterday.

So yesterday we had this stock here a bi Oh a bi Oh was squeezing up right here to this purple line. Now this purple line is the 200 moving average and what's important to know about that is that is considered a critical level of resistance. so that right there is resistance at at it was approximately six dollars and thirty one cents. Now on the side here I could see under the news window that there was no news on the stock so it's up nine percent on light volume.

hitting resistance with no news. That to me made me think that it was gonna fade. and another one of the reasons I thought that it was gonna fade or sell off and come back down was the fact that we had seen a couple of stocks um sort of similar pop up a little bit and then come right back down. and so what I decided to do was press the sell button.

Alright so I put my order up here and I'm gonna get ready to take it. So we've got thirty eight on the ask. So I click thirty eight and then I click sell Right now my order is this yellow order on NASDAQ at six dollars and 38 cents. So I've put my order to sell now this stock does not have the short sale restriction on it.

So and you can see right here it is E-easy to borrow whereas this one is L Locate hard to borrow all right so it's easy to borrow. There's no short sale restriction on it. You would either see SSR or CB This stock had short sale restriction but doesn't have that so I don't have too short on an uptick. However, in this case there's a 15 cent spread between 6:23 the bed and 6:38 the ask.

and so I figure I'll try to sell short on the ask. so I go short I put my order there at 38 I put another whole order here at 35. In between the spread, the order at 35 Phil's in partial. my order at 38 despite the ask being at 44 is not filling.

So now and there we go. So now it's starting to turn around and you can see it's coming back down. So it tapped that resistance level and is coming back down. So I'm now short 1200 shares at 6 dollars and 35 cents.

That's my cost basis. Alright, so what I'm gonna end up doing is I'm gonna cancel these orders once I Feel pretty confident that they're not going to fill. so we've got six 14 on the bid 610 605 Now I'm putting my order right down here at 6:00 to buy and I click the Buy button for two thousand shares. Now the problem with this is if that order executed I would go from being short 1,200 to being long 7,500 which is not what I want and so I neglected to type in the exact amount on this trade which ended up not being the end of the world I cancelled the order and then put typed it in for 10 81 and clicked the Buy button at $6 So now I have a buy order at $6 and when that order gets filled I'll go from negative 1081 shares to flat on the position and I will book a profit of about $400 So let's see what this does here.

So I put an order at 6:31 or 630. This is my bail out button if I have to cancel my order and press buy I can bail out. but nope. just like that.

I got filled four hundred and forty two dollars and fifty cents. Fifty seven cents and that was a short off of daily resistance. Now you can short and you know based on any setup that you happen to see. Obviously, this setup here was just like an example.

It wasn't really, it really wasn't a short. This wasn't a short set up right right here and the false break of nine. Maybe that was a short with a stop near the high, but you got to be kind of careful on those generally shorting off of critical resistance levels such as a 200 moving average is going to be best. Although there will be times where you'll see a stock that spikes up like this and this stock is up a hundred and four percent today and you'll think, wow, it's so extended it's got to come back down.

But you want to be really careful that you're not casting your opinion of what's reasonable, what's rational on the market. Because the market can be irrational, you might see a couple examples of irrational. Let's look at L Fi N this stock is currently at 38 cents. But let's back up this chart a little bit.

We back up this chart and you're gonna see back here that the stock, over the course of, well, three days, went from five dollars and 51 cents all the way on day two to $26 On day three, it opened higher. It opens at 39, squeezed up to 40 to 50 to 60, 70, 80, 90. it hit a hundred and then squeezed all the way to a hundred and forty two dollars per share. Stock can be irrationally strong.

Stocks can be irrationally strong. far longer than you'll be able to afford to hold them. Here's a stock that went from $45 to over. Oh, just about 400 dollars a share.

So you know this is the thing that puts the fear into career short sellers that you'll take a position on something like this and you'll get smoked. rkd A This is a great example of this that this is something that ended up bankrupting a small firm with a I think it was a fifteen or sixteen million dollar loss. Alright, so through this period right here I Believe it was this period and this fund saw the stock popping up hitting that 200 moving average which is the Purple Line and realized that it was squeezing up with no news. It had no reason to be moving higher and so they took a short position.

Starting with 100,000 shares, it continues to squeeze up. They add more shares to the short side. They end up with a position of about eight hundred thousand shares short and on this red days it starts to come down, it's looking great and then you know what happened the next day. The stock gaps up right here and squeezes from eighteen to twenty to thirty to forty.

It hit a high of $54.99 and while it was squeezing up, the firm started pressing the Buy button to cover the position. So remember when you're short and you have that negative, the only way to cover it is to press the Buy button. Now what happens when you press the Buy button while a stock is squeezing up from 20 to 30 to 40 or 50, you are fueling the squeeze. Now in this case, that ended up fueling the losses for that firm and it became a really catastrophic loss.

The shorting eight hundred thousand shares of a low float stock like this is incredibly risky, as you would imagine. but even if you're just shorted eight hundred shares where you had shorted eight thousand, you could have made an equally relatively equally large mistake. So one of the important things with shorting is that you always are mindful of your max loss. And of course, that's the same with trading to the long side.

Let's say you were the trader who bought this up here at $56 thinking maybe it would go to a hundred like L Fi N. and the next thing you know, it's down here. At 20, you don't want to be holding, you got to cut your losses. So that's sort of.

The moral of trading in general is keeping losses small and letting you know the winners run. But the problem with short selling is that if you make a mistake, you lose more than you put into the position. and if you go and you know if you go really aggressive then you could end up really getting destroyed. So anyways, I Hope this has been helpful.

This is a little bit of short selling 101 with a live trading Sim tray example here on AG TC and a real money trade that I took yesterday on a bi. Oh all right you guys, that's it for me. As always questions, comments, leave them right down below and I will see you for the next episode. Bye everyone Hey have you seen my most popular video on YouTube It's got over 5 million views.

You can check it out right here and check out one of my other videos on YouTube right here I Hope you guys enjoy it as always. If you have questions, leave them down below in the comment section I Personally respond to every comment that's posted.