How To Short Sell aka What Is Short Selling
With all the time I spend scouring the landscape for ideal trades, preaching against random market noise and for disciplined trading, I often forget to explain the bare bones basics. Starting now, this will change—every few days I’ll have a detailed lesson. Today, I write about my all-time favorite trading strategy: short selling 
, which involves betting on a drop in an investment’s prices.
So, how does this backwards-sounding strategy work? Ever hear the saying “don’t sell yourself short”? That means don’t believe you can’t succeed at something. Well, in short selling , that’s exactly what you’re doing—betting that xyz investment won’t succeed at increasing in value. Whether you’re betting against a stock, currency or commodity, you’re “selling that investment short.”
Short selling is exactly like buying and selling the way that you’re only too familiar with except the order is reversed—you sell before you buy. The old adage “buy low, sell high” still applies, here it’s just “sell high, buy low”. What’s worked for me is to short sell when a stock goes up waaaaay too high waaaay too quickly on waaaay meaningless news and buy it back when reason pushes prices lower, back to reality.
How can you sell something you’ve never bought, ahhhh, this is what confuses soooo many people, you’re actually borrowing shares from your broker in order to take a negative position. You’re selling shares you don’t own. For example, instead of owning 1,000 shares of XYZ when you buy its stock, when you short sell, you own -1,000 shares. You’re actually taking out a loan from your broker, which is why you must have a margin account in order to short sell–sorry IRA accountholders! But don’t worry about paying interest, if you’re quick—think a few days max, that’s what’s worked best for me—the interest on that loan is negligible. When you buy it back later, or “buy to cover” your short position aka you’re closing out your loan.
On the “Enter Order” page of most online brokers, there are options that say “buy” “sell” “sell short” and “buy to cover”—focus on the last two and that’s how you initiate and close out a short position. Some brokers—like my favorite Thinkorswim—don’t even differentiate, so you just click “sell” and then “buy” later to execute a short sell and buy to cover, respectively.
For several reasons, short selling has a bad rep—stocks and investments tend to go higher over time, you can lose more than you put in (if you short 1,000 shares of a stock at $5 (costing you $5,000) and it goes to $20, you’re down $15,000 or 3x what you put in!) whereas if you buy 1,000 shares of that same stock at $5, the worst it can do is go to 0, lsing you $5,000.
Most importantly, corporate management, shareholders and the financial media circus all do everything in their power to push prices higher, ever the optimists, because it’s in their interest to do so. No matter how sensible short selling may be, it’s a very unpopular strategy because a.) it’s often believed to be unpatriotic (nonsense!) b.) risky (not if you’re quick!) c.) difficult (nahhhh, just expect the worst in everyone—not very tough to do in this industry) and d.) the risk of short squeezes–when short sellers are forced to buy to cover their positions, either due to pressure from their brokers or because they can’t stand the pain of loss any longer, help tosqueeze stocks higher violently and quickly (scary, but the key is to short into these unnatural runups, ideally after they’ve already started downtrending).
This strategy has had its big winners—Jesse Livermore shorting into the 1929 crash, Jim Chanos shorting Enron all the way to 0, George Soros making $1 billion—yes, billion with a B—literally overnight, betting against the British Pound and me. While I shouldn’t even be mentioned in the same breadth as those legends, I’ve got a bigger mouth and I’m gonna take this strategy mainstream, showing everyone how it’s helped me—an untrained, undisciplined, emotional, ego-driven young guy—avoid never having to get a real job, earning me six-figure annual profits for nearly a decade.
As those of you who’ve read my book, An American Hedge Fund, or watched my instructional DVD PennyStocking know, I made my first $1 million naively buying hyped up stocks as they surged higher during the tech bubble. Back then, I was fortunate enough not to know you could make money through short selling , or betting that stock prices will drop lower because while short sellers who preached that stocks were ridiculously overvalued were eventually proven correct, many went bankrupt or worse, discovering they owed their brokers money (remember, you can lose more $ than you put in!)
Even more fortunate, right as the bubble burst, I learned how to short sell, earning my 2nd million dollars and managing the top ranked short bias hedge fund 2003-2006 (Barclays). A harsh lesson in just how pathetic these companies are helped me understand that hype and manipulation pushes undeserving stocks higher, there are tons of idiots on Wall Street and many companies will fail, so it’s only natural to bet on failure in addition to success. The harsh reality is that companies, especially smallcap and microcap companies, take advantage of any significant increase in stock price to raise capital, diluting their stock—as FEED just proved the other day.
Unlike Chanos and Soros, I’ve never had the patience to hold for any truly momentous gains, a result of my ferret-on-crack-like patience. Nevertheless, the keys to my success: thinking the worst of everyone and every company, trading scared and conservative (taking profits of 50 cents to $2/share then moving on) and waiting for the opportune times to strike—that being when all that hype and BS inevitably come crashing down in one quick or gradual revelation. I’m talking about shorting hyped-up stocks with near-vertical charts or those that have risen exponentially, like from $4 to $12 within a few days and betting the price will drop a little. It’s truly beautiful when it happens as you can see HERE, HERE and HERE, but mind you these wonderful opportuunites are rare so have the patience to wait for them.
Luckily, there’s many different ways to short sell, so if you don’t like my niche trading strategy, definitely check out the only 2 other books on the subject, both of which I’ve found helpful:
How To Make Money Stocks Selling Short
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1TraderJunkie
April 20th, 2008 at 6:26 pm
Tim,
Received the DVD on Friday, devoured the information and am ready to take it to the market. The DVD is well worth the price, I have been following you since the start of the year and have tried to put your strategy together through bits ans pieces here and there, yeah……..should have bought the DVD months ago. Your trading strategy makes more sense and is very detailed in your approach. Highly recommended, tell your cheap ass readers (the ones that ask the same annoying questions: how do you trade, what is a short sell, where do you find the stocks your going to play) to fork out the money to buy the DVD, they won’t regret it.
-TraderJunkie
2InvestorsLive(TIMBUCKS: $26)
April 20th, 2008 at 7:19 pm
Alexa rating getting better almost cracked the 70k mark
3JJ(TIMBUCKS: $55)
April 20th, 2008 at 7:46 pm
Sounds like you’ve got your 2nd book title…great post! TraderJunkie is rigth the DVD is the BEST tool to learning this niche.
4Joe
April 20th, 2008 at 8:08 pm
Tim, you’re running neck and neck with dealbreaker.com on alexa.com
5ep
April 20th, 2008 at 10:01 pm
The reviews on the two books you recommended are negative, what gives???
6timsykes
April 20th, 2008 at 10:05 pm
who cares about reviews, u have no choice, there’s no other books out there on short selling not to mention that amazon reviews can easily be manipulated–in case u didnt realize us short sellers arent so popular considering we stand for everything that wall street despises, namely truth and reason
7Tommy
April 20th, 2008 at 11:17 pm
haha saw this on a message board. funny and true.
Its not that Timothy Sykes is not a good teacher. cause thats not the problem at all. its just he is still at infancy with his learning/trading skills. I am sure there were thousands of timothy sykes people during the dot com era and made money exactly the way he did. he was just the only egotistical one to brag about it.
8Joe
April 20th, 2008 at 11:31 pm
Tommy, he made a ton of money during the dot com era, then he made a ton of money in the fall out of the dot com era. aka not random.
9jeff
April 20th, 2008 at 11:37 pm
tim, great dvd, i posted a review here on elitetrader, your favorite, right! what a bunch of fools
http://www.elitetrader.com/vb/.....genumber=8
also wanted to thank you for EDEN, made a cool $2k on Friday, all thanks to you and your DVD, thanks again!
10Noobtrader
April 20th, 2008 at 11:44 pm
Thanks for this post Tim, very helpful. I’m buying your DVD in another month or so (and I still owe you a review for your book too…) my company is super busy getting ready for the upcoming season, so I want to make sure I have time to enjoy it… talk soon.
Cheers,
Noobtrader
11MT
April 21st, 2008 at 12:24 am
FYI there are plenty of other books on short selling, evident just by browsing around Amazon using the links at the end of the blog post on those 2 books!!
12timsykes
April 21st, 2008 at 12:34 am
ha which books are those? there’s sold short but it pretty much sux, i’d love to hear about these other ones (i know elder’s got one coming soon)
13Oliver(TIMBUCKS: $10)
April 21st, 2008 at 1:49 am
talking about manipulation and short selling being almost the same as buying, its true. theres people who hype them up and you are hyping them down. allows everybody even more profits as long as you go in when the time is right.
and you know you are promoting your strategy that its actually starting to become nothing more than an entertaining timothy sykes aka “WWE” and “the rock” as you refer to them.
i read almost every post since november and i only do it for entertaining purposes rather than to figure out the next hyped up and hyped down company on wall street. i have never traded a stock on this site and most likely never will.
what i find is the peak of everything is that you claim that everything else (especially not failing companies) are just a random guessing game. most of the times it is, i agree on that. but there is times where is not and highly profitable (short and long!). and you saying that nobody has an egde there is stupid, because YOU are the one who has no edge there and tell everyone to start using your strategy.
14timsykes
April 21st, 2008 at 1:55 am
of course there are times when some people can have an edge, but u forget i’m talking to now 5,000 people/day, 4950 of them or so will have no edge whatsoever so i’m not gonna qualify my statements for that 1%. just like when i say all these microcaps are crap, yes, maybe around 1% of them aren’t, but again, i write/trade in terms of odds.
u have no idea how stupid people are cuz u havent seen the tens of thousands of emails i have–not saying its a bad thing, its just reality…and i’m gonna protect those stupid people from making stupid mistakes–the trades i write about, even stupid people can do well on, myself being the perfect example.
i know these concepts are far and away too much for the lot of u o grasp–you’re used to just “buy this” BS, but just trust me, this is my life, i understand y audience, the risks, the scalability issues, the self-fulfiling prophecy issues, liquidity, etc…read y book and u’ll see i’ve been through it all from many diff angles…now just watch how i make this angle takeoff to everyones benefit
15Oliver(TIMBUCKS: $10)
April 21st, 2008 at 3:32 am
well im on tims side in the end. what i appreciate is that he has an egde in some market, his is microcrap companies with hype and he is willing to share his experience and egde with everyone who happens to come across this website. its a good and profitable strategy, perfect for small accounts which will probably give you a higher income than the average once the account is big enough (probably after the SEC hump at 25k). that is what i have seen over the months since november and i hope to see this until the $1.65M.
16Aegir
April 21st, 2008 at 3:56 am
This is very simple, just follow the trend, if it’s down dont go in, if it’s up go in.IMO
17timsykes
April 21st, 2008 at 8:01 am
some spammer posted this but it keeps going to the spam folder:
“Tim is likely a socialist pig. He can’t handle posts that disagree, his personality should tell you that! Your strategy is total crap, any true traders making money via a planned out strategy would NEVER trade your crap volatile empty your account style penny stocks! Never! Get that straight and be honest with your readers, most of which are newbies AND YOU USE THEIR liquidity to buy and sell. People, wake up!Tim the MULTI MILLIONAIRE, mind you, protecting you from big traders? As if, that chump WAS the enemy, he WAS the hedge fund liar. These are extremely low float and dangerous vehicles. Tim probably makes his trade and money and THEN tells u about it when he has already sold to u, or shorted against u.He hides behind his BS about front running rules. Probably wants u to help him short too since the float is so low. That’s a LOW DOWN dirty shame.
You are a fraud Sykes.”
Gotta address it:
1. I don’t care if anybody disagrees with me, just don’t come to my site and spam the same message, it doesnt add to the discussion.
2. i NEVER trade against anybody–idiots actually seem to believe i do, they just cant get over my business model based on brutal honesty….only made $6k in trading in the past 6 months, another $100k or so in product/ad sales, welcome to my biz model you morons, go ahead and have the SEC call me, i can show anybody all my records and would welcome to the opportunity to shut these losers up
3. the haters have EXACTLY 4 ip addresses, all of whom post on elitetrader, i’m in the business of teaching, these guys arent, no matter if they make money or not, they are typical middle-aged traders who have no lives so they love making anonymous comments on the internet….sad, but welcome to why society cares little about our industry, the people in it, by and large are quite detestable
18Tony Ellis(TIMBUCKS: $23)
April 21st, 2008 at 8:02 am
What do you think of ASIA?
19timsykes
April 21st, 2008 at 8:06 am
i think its a slow moving triple top until proven otherwise
20Tony Ellis(TIMBUCKS: $23)
April 21st, 2008 at 8:13 am
lol…it’s on the watch list. Maybe it will prove itself this week.
21timsykes
April 21st, 2008 at 8:19 am
got 2k EDEN borrowed, no TIGR available, company’s smart to change name/ticker to screw up shorts, good pumpers!
22Noobtrader
April 21st, 2008 at 1:20 pm
What is a “triple top”?
I want to understand your lingo so I can participate in these discussions more.
Thanks.
23josh(TIMBUCKS: $1)
April 21st, 2008 at 2:32 pm
Tim, what you mean by EDEN borrowed.. is that mean you short EDEN ..?
24josh(TIMBUCKS: $1)
April 21st, 2008 at 2:36 pm
and at what price..
correct me if is it too much to ask..
25timsykes
April 21st, 2008 at 2:39 pm
u have to borrow shares to short, u reserve them first before shorting, i often borrow without shorting, i just borrow just in case
a triple top is exactly what it sounds, its a bearish chart pattern
26Noobtrader
April 21st, 2008 at 4:52 pm
ok… what is a bearish chart pattern then? I have my own idea of what that means; I’m more looking for clarification (what your definition is) so that I can use these terms properly in future conversations and/or if I read them I know what the writer (you) is talking about.
My objective is to learn, not drive you crazy. You’ve taken on the teacher role; I’m a student who asks a lot of questions… albeit not dumb questions, because I don’t know the answers.
Give it to me Mr. Cowell… =D
27timsykes
April 21st, 2008 at 4:56 pm
i’ll answer all questions, but i’m gonna refer you to my DVD first cuz it’ll answer about 99% of the questions newbies have…thats why i made it, its good for u and me
28Noobtrader
April 21st, 2008 at 5:21 pm
LOL!! rad!
Done… I’ll ping you on facebook in another couple of weeks to order it.
thanks man!
29What Bubba Could Read
April 22nd, 2008 at 4:30 pm
Bubba seen that the dude who posted that par’graf ’boutchu, Tim, wuz jus’ ‘x’cizin’ hiz right to TRUST NO ONE. Ain’t that one a the cardinal rules for spec’latin’? And why he’s gotta make it public is ‘cauz yur public. But we don’t care. You just keep up this log and Bubba’ll keep makin’ bacon. Bubba don’t care ’bout no Tim basher.
30noobtrader.08(TIMBUCKS: $78)
May 1st, 2008 at 12:31 pm
I don’t understand how you 3x what you short in this example… “(if you short 1,000 shares of a stock at $5 (costing you $5,000) and it goes to $20, you’re down $15,000 or 3x what you put in!) whereas if you buy 1,000 shares of that same stock at $5, the worst it can do is go to 0, lsing you $5,000.”
Please explain.
Thanks.
31noobtrader.08(TIMBUCKS: $78)
May 1st, 2008 at 12:33 pm
err LOSE 3x what you short in my question above… I think faster than I can type… *grin
32noobtrader.08(TIMBUCKS: $78)
May 2nd, 2008 at 12:14 pm
Tim, can you answer the above? I’m not clear on this formula.
Thanks.
33timsykes
May 2nd, 2008 at 12:19 pm
do the math u short at $5, now the stock is at $20, you’ve lost $15/share…same as if u bought at 20 and sold at 5, just in reverse order…and since your losses can grow huge–like if this stock went from 5 to 50–u can actually go into debt