RISK & HEDGING
Short Selling (Short Sell): Definition, Math, Risks, and MT5 How-To
Learn how short selling works, why traders use it in falling markets, the profit/loss formula, CFD advantages, typical setups (breakdowns, patterns, MAs), and step-by-step execution on MT5—plus what a short squeeze is and when shorting may make sense.
Short Selling
CFD Trading
Department
OTM Academy
Category
Fundamental Analysis
What Is Short Selling?
When markets fall, “buy low, sell high” doesn’t help. Short selling lets you sell high first and buy back lower to capture the decline. Instead of opening a long, you open a sell position; if price drops, the difference is your profit.
Plain-English Analogy
Imagine you “have” the share at $100 and sell it now. Later, price falls to $50—you buy it back. You end with the same share + $50 difference.
How Traditional Shorts Work
In classic equity markets you borrow shares via your broker, sell them in the market, then repurchase later to return to the lender. Profit is the sell price minus the repurchase price, minus fees/interest.
P/L Formula & Example
Formula:(Sell Price − Buyback Price) × Quantity − Transaction Costs = Profit
If you short 100 ABC @ $20 and cover at $10, profit is:($20 − $10) × 100 = $1,000 (before commissions/financing).
If price rises and you cover @ $50, loss is:($50 − $20) × 100 = $3,000 → losses can exceed initial capital because a stock’s upside is, in theory, unlimited.
How to Short on MT5 (CFDs)
Open a demo or live account.
Download & install MetaTrader 5.
Log in → open Market Watch.
Double-click the symbol → set Volume (lot size), add SL/TP (optional).
Click Sell by Market to open a short.
Use-Cases, Squeezes & Setups
When it can make sense: market crises (e.g., 2008), corporate scandals, or earnings misses that flip trend to down.
Short squeeze: sharp rally that forces shorts to cover, accelerating the spike—common after breakdowns that quickly reverse on heavy buy flow.
Technical strategies:
Breakdown of rising trendline, then retest/fail.
Bearish patterns: Head & Shoulders, Double-Top.
Moving averages (50/200-day):
If MA200 > MA50 (bear bias), MA200 acts as resistance—failed tests can be short entries.
If MA50 > MA200 (bull bias), a break below MA50 may target MA200 for tactical shorts.
Risk note: Always size positions, use stops, and plan exits; volatility, financing costs, borrow constraints (on cash shorts), and squeezes can magnify losses.
