Short selling, shorting, or simply “shorting” is a trading method of initiating a trade with a sell order in anticipation of a downward moving market. While shorting is a common practice for experienced traders, there are some significant barriers for traders to short sell certain assets. One of the most obvious advantages of trading futures is the ease with which traders of all levels can short their favorite markets.
Learn more about the ease of short selling futures in this short video:
What is Shortening?
The easiest way to understand shorting is the old adage – “buy low; sell high”. If you describe this statement as “Sell high; Buy short”, you are describing short selling. Down-trending market speculation is for traders to want to sell a financial instrument at a higher point, only to later buy it back at a lower price for a profit. While it may be a strange concept for new traders to understand initially, it is quite common. Simply put, short-sellers profit when the market is down. Many traders use this as part of their overall strategy. Will enter both long and short trades in the U.S. You can immediately see that trading both the long and short sides of a market under different conditions can double your trading opportunities.
Shorting Stock Limits
Another reason why new traders may not be familiar with the concept of short selling is because of the limitations and restrictions associated with shorting the stock market. To short sell a stock, you need a margin account. A margin account essentially allows you to borrow against your short trades and cover any potential losses. it also invokes pattern day trader rules, which requires stock traders to maintain a minimum account balance of $25,000 if they execute more than 4 roundtrip trades in a week. Don’t be afraid though! The futures markets are not that complicated.
Benefits and ease of shorting futures
With futures, you can trade as long or as short as you want, provided you meet the margin requirements for the contract you are trading. With products such as the Micro E-Mini Index Futures, this means that new traders with modest account balances can start shorting. When you “short sell” a futures contract, you are buying a contract to sell at a lower price in the future (preferably). Unlike the stock market, no borrowing is necessary. You can see how this contributes to a more level playing field between long and short traders, as all traders long or short have the same financial requirements.
Additional Benefits of Shorting Futures
While the benefits of short selling in futures over stocks are immediately apparent, a few additional factors make shorting futures clear and simple. First, trading CME Group Futures centralizes activity on a single exchange, while stock trading takes place across dozens of exchanges. With futures, you have a clear picture of what all the market participants are doing.
A central market also creates large, consolidated pools of liquidity. Consistently high liquidity in the most popular futures markets makes it easy to enter and exit trades as market participants are ready on both sides of the market at any given time. Volume in stocks can vary greatly from day to day and it is not unusual for equity traders to have difficulty entering or exiting a trade.
Futures are also used as a means of hedging, meaning that futures investors will trade multiple markets simultaneously. Commodity futures are typically traded in equity index exposure to hedge risk and diversify the portfolio.
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