Cryptocurrency trading is one of the best ways to earn profits, with traders having access to an array of different strategies such as technical analysis and fundamental analysis. But what should traders do in a prolonged bear market that causes continual price declines? Shorting or short selling the market may be a good way to navigate these dips while simultaneously preserving capital and managing risk.
In this article, we’ll take a closer look at the process and strategies behind shorting the market. We’ll explain what shorting means, how to short on Binance, and the risks associated with it. So read on to find out more.
What is shorting?
Shorting, also known as short selling, is when a trader sells an asset, expecting to buy it back later at a lower price and thus profiting from the price difference. By doing this, the trader is taking a bearish outlook on the asset’s performance.
Shorting can be used in many financial markets, including stocks, commodities, Forex and cryptocurrency. This strategy is commonly used for both short-term and long-term strategies, in combination with a wide variety of financial products such as margin trading, futures contracts, and other derivative products.
In basic terms, the trader borrows an asset from its holder, (often from a broker or an exchange) and immediately sell it. If the asset’s price goes lower than they expected, they buy the same amount of the asset they borrowed and repay it with interest to the holder. The trader’s profit is ascertained by the difference between the price at which they shorted the asset and the price at which they bought it back.
For example, if a trader shorted 1 BTC at a cost of $8,000, expecting the price to go down, and it goes down to $6,000, they would buy back 1 BTC, return it to the lender, and earn a profit of $2,000 (minus interest payments and fees).
Risks of Shorting
When it comes to Shorting, there are numerous risks to consider. It’s important to note that the potential loss for a short position is theoretically infinite, as the potential upside for price is endless, as opposed to long positions where the potential losses are restricted to the size of the position. Professional traders who have not taken this into account have often been caught in negative positions and gone bankrupt as a result.
Liquidation is also a risk to consider as positions will be forced to close with a stop-loss order if the market goes against you. Traders should also have a clear invalidation point and use a stop-loss to limit their losses when attempting to short the market.
How to Short on Binance
If you’d like to try out shorting on Binance, there are a few different ways you can do so.
One is by using Binance’s margin trading platform, in which you can follow the step-by-step instructions in Binance’s margin trading guide or the video tutorial.
Another way would be to use Binance’s futures platform, where you will be able to open perpetual or quarterly futures positions. Before trading live it is important to understand how the platform works, and you can read more on this in Binance’s futures guide before trying out the platform. The Futures testnet serves as a great way to paper trade and practice the shorting process without risking real funds.
Binance’s options platform, available on both iOS and Android, also offers traders the ability to short. Trading options gives you the right but not the obligation to sell an asset at a certain price. You can follow the steps in this guide to short Bitcoin or any other cryptocurrency on the platform.
Wrapping Up
Now that we’ve gone over what shorting is, the various strategies and platforms to use when shorting, and the risks involved, traders should be more aware of the specifics of shorting and how it can be used as a strategy.
It is important to remember that proper risk management is always a must, and to never risk more than you can afford to lose. Reading A Complete Guide to Cryptocurrency Trading for Beginners can provide even more insight into the strategies and methods for trading.
For those who are looking to try out shorting, Binance offers three different platforms, each tailored to different styles of trading. Be sure to read up on the platforms carefully and practice with paper trading before going into live trading.
