Unit 1 · Level 4 · Leverage & Margin
Short selling: profit from falls
Shorting inverts the trade: borrow the asset, sell it now, buy it back cheaper later, keep the difference. It lets you profit from declines and hedge holdings. But the risk profile flips dangerously: a long can lose 100% at most. A short's loss is UNCAPPED, because price can rise forever.
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What this lesson covers
The short squeeze
When too many traders are short and price RISES, their buy-backs (forced or panicked) fuel the rally further. That's a short squeeze. GameStop 2021: a heavily-shorted stock went up ~20x in weeks, partly powered by shorts buying to escape. The crowd's exit became the rocket.
What you get asked
Order the mechanics of a profitable short
Sell high, buy low: same math, reversed order. Borrow fees tick while you're in, so shorts also pay rent.
Why is a short's maximum loss theoretically infinite?
And prices have no ceiling. Long: worst case, asset → 0, lose 1×. Short: asset can 3x against you and you owe the whole difference. Asymmetry demands tighter discipline. Stops on shorts are not optional. Ever.
Match the shorting concept to its meaning
High short interest = dry tinder. A spark of good news can ignite the squeeze, so check it BEFORE joining a crowded short.
'This coin/stock is garbage, obviously going to zero.' So why do experienced traders STILL short it carefully or not at all?
Being right eventually doesn't survive being liquidated today. The market's oldest tombstone: 'He was right, early, and leveraged.' Timing + survival beat being correct. Keynes said markets stay irrational longer than you stay solvent. 🐜
The rest of this unit
Amplification, liquidation, short selling, and why the 1% rule survives it all.