Jesse Livermore, one of the greatest stock traders in history, made his biggest market killings when he shorted stocks.
In particular, he made $100 million (worth more than $1 billion in today’s money) when he shorted the market in 1929.
Non-expert traders should be reluctant to short stocks though, without very great cause.
Here are some reasons why short trades are riskier than long trades:
Why you should think Twice Before Shorting
- When a long goes against you, your position size falls. When a short goes against you, your position size rises, increasing your risk.
- A rising stock market serves the interests of society’s most influential people – business owners and governments. They will lobby and legislate for conditions in which businesses and wealth creation can prosper. Notice how central banks cut interest rates when economic conditions take a downward turn.
- Business owners and managers work hard to make their businesses succeed. Their desire to increase their profits usually results in rising stock prices.
- The long-term charts of the Dow, S&P500 and the NASDAQ reflect points 2. and 3. The long-term direction is upward. When you short, you go against the natural, long-term market trend.
- Long positions can result in 100% loss of your stake. Short positions can lose you an unlimited amount.
Every serious trader should have shorting as a stock trading tactic – but it’s a tactic that requires greater caution than going long.