How To Control Risk When Short Selling – Thoughts on TradeZero

There are many different ideas about what it takes to succeed in trading. 

Developing a statistically-significant strategy, learning market structure, developing self-control, and learning to think in probabilities are all some of the qualities traders need to assimilate into their everyday lives to become professionals, but all effort would be futile without one key quality: risk management. 

Consider the trader who can predict, with relatively good accuracy, what the market is going to do in the short term. To an outsider, this ability would mean success in the markets, but traders know better. Even if your accuracy is a staggering 90%, you would still lose money if, on average, your losses are ten times the size of your winners. This is not conjecture; it’s math. 

In short selling, the importance of risk management is amplified, as losses are theoretically infinite when trading to the downside. Additionally, short sellers experience complications that long traders do not, adding to complications to an already difficult task of consistent risk management. 

Aside from practice and study, selecting a short-friendly broker can help traders significantly improve their risk management and instill the principles necessary for long-term success in the markets. Trader Stephen Johnson found his help through TradeZero, a broker with a host of favorable short-selling features.

Takeaways From The TradeZero-Benzinga Interview

In an interview with Benzinga’s Spencer Israel, Johnson and TradeZero CEO Daniel Pipitone tackle the subject of risk management in short selling. 

The episode starts off on a sobering note. “Trading isn’t easy,” says Johnson. “Let’s just say that first.” For anyone who has attempted to trade for a long enough period, this is an opinion that resonates. You will often find it scattered around the web where the concept of trading arises in the discussion, but it is also reiterated through more formal sources like academic studies. 

“The easiest way to control risk is to make small trades,” says Johnson. When traders first start, they must start with a sum of money they’re comfortable handling. This sum is different for each trader. If traders begin with too large a sum, emotions will sink in, prompting irrational decisions. 

“We’re always encouraging people to set short stops,” says Pipitone. TradeZero empowers the trader by allowing the broker to manage risk for them. For example, traders can set daily loss limits, which prevent them from trading after reaching a loss threshold. 

“Make ‘Keep It Simple, Stupid’ (KISS) rules,” adds Johnson. KISS is a design principle with U.S. navy origins, but the framework is relevant to trading. A simple rule like “don’t trade past 10:00 AM” is a KISS-approved risk management strategy that could save opening-bell traders tons of money. Applying KISS rule-making can help prevent many unnecessary losses.

“Take small losses,” concludes Pipitone. This is one of the most repeated truisms on Wall Street, and for good reason: It helps. Trading requires a detachment from one’s ego and pride, and learning to take losses gracefully is key to sustaining a healthy win-to-loss ratio, a crucial element in risk management.

Picking A Short-Friendly Broker

Aside from the daily loss limits, TradeZero offers a variety of short-selling functions to the retail community. 

The broker specializes in producing some of the hardest-to-find locates on the market, meaning traders have a much higher likelihood of finding stocks to borrow for their short positions. This extensive locating ability comes with commission-free trades (with a few exceptions) and no compromise on the quality of execution prices.

TradeZero is taking its short-selling abilities to new heights with its patent-pending credit back feature, which allows traders to sell back locates they did not use or no longer need to other TradeZero traders. TradeZerp won the Benzinga Global Fintech Award for Best Brokerage for Short Selling in 2020, 2021, and recently 2022.

Want to take a stab at short-selling? Click here to learn more about short-selling with TradeZero.

Featured Photo by Dimitris Chapsoulas on Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice or a recommendation as to any security or trading strategy. Trading securities can involve high risk and potential loss of funds. Likewise, short selling as a securities trading strategy is extremely risky and can lead to potentially unlimited losses. Any views or opinions expressed in the content are those of the author or the interviewed third parties and do not necessarily reflect the views or opinions of TradeZero or its employees. Daniel Pipitone is a co-founder of TradeZero. Stephen Johnson is a paid marketing partner for TradeZero and may receive compensation for introducing customers to TradeZero.