Course Content
What Is Shorting in the Financial Markets?
There are countless ways to generate profits in the financial markets. Some traders will use technical analysis, while others will invest in companies and projects using fundamental analysis. As such, you, as a trader or investor, also have many different options to create a profitable trading strategy. However, what if the market is going through a prolonged bear market, where prices are continually declining? What can traders do then to maintain a source of income from trading? Shorting the market allows traders to profit off price declines. Entering a short position can also be an excellent way to manage risk and hedge existing holdings against price risk. In this article, we’ll explain what shorting means, how to short Bitcoin on Binance, and learn about the risks of shorting.
What Is Shorting in the Financial Markets?
About Lesson
There are a number of risks to consider when it comes to entering a short position. One of them is that, in theory, the potential loss on a short position is infinite. Countless professional traders have gone bankrupt over the years while being short a stock. If the stock price increases thanks to some unexpected news, the spike up can quickly “trap” short sellers.
Naturally, if you’ve been reading Binance Academy, you know that having an invalidation point and setting a stop-loss is crucial for every trade. However, let’s still talk about this concept because it may be helpful to understand.
How much is your potential loss when going long on the spot market? Well, it’s the size of your position. If you’ve got 1 BTC that you’ve bought at $10,000, the absolute worst case that can happen is that the Bitcoin price falls to 0, and you’ve lost your initial investment. 

However, what if you’re shorting Bitcoin on a margin trading platform? In this case, your potential downside is infinite. Why? Because the potential upside for price is infinite. In contrast, the price can’t go lower than 0 when you’re long.

So, if you’re shorting a borrowed asset and the price increases and keeps going up, you’ll keep incurring losses. With that said, this is more of a theoretical risk than a practical one, as most platforms will liquidate your position before you’d arrive at a negative balance. Even so, it’s worth keeping in mind, as it shows you why it’s always paramount to keep an eye on margin requirements, and to always use a stop-loss.
Other than that, standard risk management principles apply to shorting. Protect your downside, use a stop-loss, think about position sizing, and make sure you understand the risks of liquidation.