Short Selling for Day Traders: A Beginners Guide

Short selling for day traders

Like every other trading market (Forex, Stocks, and Bonds), the cryptocurrency markets are riddled with the market going in both directions, up and down. Short selling points to a kind of trading that involves an investor’s attempt to make profits off assets fall. Some traders don’t favor short selling the market, saying it is horrible, because they feel trading aims to buy low and sell high for profits at a later time. However, traders who want to profit from trading crypto assets should not hold on to this self-limiting bias and emotions. 

Learning to short-sell in the cryptocurrency world is fundamental to becoming a complete trader. The current downtrend in the prices of cryptocurrency assets in 2022 is enough statement to show you can make profits when the market falls. This piece will guide you on how to short-sell cryptocurrencies, the leading crypto exchanges where you can short, and the risks and benefits involved. Also, it will explain everything you need to know to start making profits shorting as a day trader (trading frequently within a day for profit).

What is cryptocurrency selling?

Short-selling cryptocurrency means selling a crypto asset at a given market price to buy it at a lower price. The idea behind shorting is that the trader is short of the funds to buy the cryptocurrency to sell later at a higher price. So, usually, the trader borrows the crypto asset from a broker or an exchange to place the short trade. The trader gets to pocket the difference in the price of an underlying asset when he sells high and buys low. But this is only after returning the borrowed funds and paying commissions for opening the trade. On the other hand, a trader loses out when the price of an asset rises beyond his selling price. 

Shorting in trading is the opposite of placing a long (placing a buy order on crypto assets to sell them at a higher market value) trade. Note that there is a distinct difference between the two in case you want to place a trade.

Although short-selling cryptocurrency is a risky adventure because of high volatility, it promises mouth-watering rewards if you place them carefully. With the right strategies, traders can build the requisite experience to place trades and make gains shorting cryptocurrency. Next, you will discover steps to follow before opening any position, short or long. 

Strategies to short-selling cryptocurrencies

Several key factors should influence your decision-making before you open a short position. Here, check out some of them:

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Double Top

One great way to determine if a crypto asset is good to short is to look for a double-top pattern. When the price of an asset increases significantly, followed closely by a period of consolidation, then a new price increase that fails to produce a new high, traders can take a short position. In this case, it signals that the market uptrend might be over and great for shorting.

Cryptocurrency Rallies

When rallies occur in cryptocurrency, crypto asset prices soar so high till they become overbought. Usually, during this duration, there is a lot of hype surrounding the crypto asset that prompts it to rise so high. When the hype dies, it falls to its original value and presents an opportunity for short traders to take advantage. RSI tool and several others can help you discover if a crypto asset is overbought. 

Head and Shoulders

The head and shoulders pattern is a technical indicator that shows a reversal in the market trend. Three points on a crypto asset chart show a trend reversal: a middle high point representing the head surrounded by two points almost equal in height. Once you notice this on a crypto chart, it is usually followed by a price drop. Make sure to confirm the asset is dropping before you place a short. 

Technical Analysis

Employing technical analysis to trade decisions is an important activity every trader should partake in. Technical analysis shows the market trend and traders’ decisions on a chart. It involves using real-time data to make predictions of how the cryptocurrency market will play out at a later time. Traders look at metrics like the past performance of currency pairs, movement, and trade volume. Most often, the basis of technical analysis is that prices and trends (short and long-term) do repeat themselves.

Some technical analysis indicators traders can use to predict falling crypto prices are:

The Relative Strength Index (RSI) indicates whether an asset is overbought or oversold. The extent to which crypto assets change in price is predictable with this tool.

Bollinger Bands determines the relative high and low of a crypto asset’s price.

The Average Directional Index (ADX) is an indicator that shows the strength of a trend. 

Standard Deviation applies to the annual rate at which return on investment is calculated. It provides information about the historical validity of all cryptocurrency investments.

Other tools for technical analysis traders can use to predict a falling market trend are Moving Averages (MA), Fibonacci ratios, and extensions. Although these indicators are complex for a newbie trader to learn, knowing them is essential to forming reasons for taking a short-sell trade.

Fundamental Analysis (FA)

Using fundamental analysis to measure trends before making trading decisions is recommended. Fundamental analysis deals with studying the forces of the market that are responsible for the supply and demand in the cryptocurrency market. Keeping up to date with news, market sentiments, transaction activity, utility, adoption, external and internal value, and trades form the basis of fundamental analysis. 

Fundamental analysis in cryptocurrency differs from that of more traditional (Forex, stocks) markets. Therefore, there are three key metrics to consider when analyzing crypto for fundamentals.

Transaction Count

This metric gives users an idea of activities surrounding trades on the blockchain network. Traders can use moving averages (MA) and specific timeframes to determine over time how crypto assets changes. However, it is not a certainty that this metric provides exact information, such as the number of individuals who make transactions. Some transactions are between different wallet addresses of the same individuals. 

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Transaction Value

The transaction value indicates the worth of crypto transactions completed within a certain period. For instance, if fifty people transfer Ethereum in a day, the transaction count on the asset will be fifty. Now, if one Ethereum trades at $2000, the transaction value of fifty persons would be $100,000.

On-Chain Metrics

The on-chain fundamentals are easy to spot. Traders can find out about this metric by searching for data on a blockchain. It is not difficult to find as some websites and exchanges have provided users with all data concerning the cryptocurrencies on a different blockchain. 

For instance, data from BelnCryoto in 2021 show estimates of new Bitcoin addresses and the percentage of individuals in profit. It shows data that shows the dominant force in the market is not individual retail traders. Also, Bybit offers on-chain data charts for several cryptocurrencies that users can assess when trading on spot. 

Benefits and shortcomings of short-selling cryptocurrencies

Every decision you make in the cryptocurrency market has its benefits and shortcomings. Here are the positives and negatives that you will encounter short-selling cryptocurrencies.

Pros:

The profit potential of shorting cryptocurrencies is high. Shorting a chosen crypto asset that is on a decline presents an opportunity to make profits. If your analysis of the market indicates that a particular asset is going to fall, you can place a short trade on it for gains. 

Shorting can be the perfect opportunity to protect your portfolio from the downside risks of the cryptocurrency markets. When the market is going down, opening short trades with some of your portfolios can help you easily recover from the loss of other assets in your possession. 

The capital requirements for shorting are not on the high side. Many platforms provide users with the option of leveraging (multiplying capital with borrowed funds) their funds to open bigger positions. 

Several platforms allow users to short the cryptocurrency market. If you don’t know which platform to start from, read on to the final pages to find out recommended platforms.

Cons:

Shorting cryptocurrency can be a risky endeavor, especially if you don’t know what you are doing. You can end up losing so much of your trading capital once the price of the asset you trade begins to rise. Traders can get caught by bear traps and short squeezes in the market and lose out. 

Investors have problems getting margin accounts with crypto exchanges, which is a must-have for some of these marketplaces. Also, there are margin interests charged on open short positions.

Overall, learn to put everything necessary in place before opening any short position. It is pertinent you don’t keep feeding the market with liquidity by being a depositor but not a profit maker.

How to start shorting cryptocurrencies

Here is a detailed step-by-step guide to shorting cryptocurrencies.

Discover a trend

The volatility in the cryptocurrency market is contributed by several factors. News developments, sentiments, and celebrity hype can impact the growth and value of cryptocurrencies. For instance, Elon Musk, regarded as “The Dogefather,” was responsible for the rally of the dogecoin in 2021 with some cryptic tweets on Twitter. Therefore, make sure to find out what the trend is before shorting. 

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Open a margin trading account

Most of the crypto exchanges offer traders looking to short-sell with leverage. You need to open one such account that enables you to trade with margin using their platform.

Minimize your risk

Due to the high volatility of the crypto market, you can effortlessly lose your deposits and profits even if you follow the right market trends before taking shorts. It is crucial to have risk management strategies to minimize your risks. Use stop losses, reward to risk ratio, and take profits to limit getting scarred by the markets. 

Open a position

Finally, whenever you have determined your entry and exit for short trades, enter your trade details and start making the profits you desire.

Where to short cryptocurrencies

Binance

Binance allows traders to short different cryptocurrency pairs. Some options it offers include margin trading, futures, and options contracts. Decide which one suits your trading goals, fund your account, and start placing trades. 

Kraken

Kraken is one of the biggest cryptocurrency exchanges located in the US. Short traders are required to open a margin account after completing the know-your-customer (KYC) details.

Coinbase

This is one of the most popular cryptocurrency exchanges in the US. Although margin trading is not available for traders, there is an option of futures contracts where you can short without using leverage.

Other top exchanges for shorting include Bitmex, Bitfinex, Mexc, and Bybit, amongst others. 

Ways to short-sell cryptocurrency

There are several ways to short-sell cryptocurrencies, with exchanges offering some of them to traders on their marketplace. Some allow you to borrow funds while you might have to go through other routes to short cryptocurrency.

Contract For Difference (CFD)

Contract for difference is one way of short-selling cryptocurrency without owning the crypto asset. Instead, traders make predictions and trade on price movements of an underlying crypto asset. Unlike some other ways of shorting, traders don’t have to find a broker or individual to borrow crypto from before placing a short trade. 

CFDs allow traders to use leverage to place shorts. For example, a trader can use $10 to short with $50 on a 5x leverage position. Using high leverage increases the chances of making more profit from the trade difference and excessive loss if the underlying asset rises. 

Margin Trade

Using margin to short-sell an underlying crypto asset requires borrowing funds from an exchange or broker to trade. Traders keep the difference on trade after buying high and selling low when the price decreases. 

Binary options

Trading binary options allow you to place a bet on trade to fall within a certain period. If a crypto asset falls as you predict, you will pocket some profit.

Futures contract

A futures contract involves an exchange or broker and a trader entering into an agreement to swap crypto assets at a chosen price in the future. When a crypto asset reaches a specific price, the crypto exchange sells it to the trader, who later buys it at a lower amount for some profit.

Conclusion

Short-selling cryptocurrency is an effective strategy that can give limitless returns if appropriately implemented. The trend is your friend to study. Use technical indicators available on charts (representing traders’ reactions to market trends) to predict your next short trade. 

 

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