Short Selling Stocks: The Challenges Nobody Talks About

Short Selling Stocks: The Challenges Nobody Talks About

Trading Blog


December 25, 2020

Now that I’ve been day trading for over three years, it’s crazy to see people trying to sell it as a get rich quick scheme. People who start day trading often have no idea what they’re getting themselves into. You can’t just learn a few patterns and start winning; it simply doesn’t work that way.

The learning curve is real. It takes months to understand the principles of day trading, and it takes years to comprehend why the market acts the way it does. On one side, you have the simplified logic of supply and demand, visual patterns, and a list of catalysts to look out for. On the other hand, you have human error, psychology, and market volatility.

It takes several years to get the hang of it and transform theoretical information into experience and understanding. And even well-versed traders admit that things are never 100% clear. Some perceptions change, personal rules get tweaked, and trading plans get adjusted.

When I started day trading, I was immediately drawn to short selling. It made more sense to me on the intuitive level, and I traded better when going short as opposed to going long. Short selling is still my preferred way of day trading. However, I wish I knew more about it back when I started.


Day trading costs money. That’s an obvious statement for anyone who’s ever considered opening an account. There are platform subscription costs and brokerage fees, as well as the price of courses and other education. On top of that, there are some fees that only short sellers will have to deal with.

First, there are borrows. That’s the cost of borrowing shares before you’re able to trade them. A long buyer purchases shares to sell them later, while a short seller has to borrow shares before entering the trade.

Borrows typically cost between 3-5 cents a share, but sometimes it goes higher than that. Some traders prefer to calculate it as a percentage of the stock price, but I like to keep my math simple. So let’s take an example.

If you’re buying 100 shares at $1/share, and your risk is $10, your gain should be $30 following the 1:3 risk/return principle. But if you’re paying 5c a share just to cover the cost of borrowing them, it’ll cost you $5 out of your expected 30-dollar profit. That means that you’re giving up ⅙, or close to 17% of your gain before the trade has even begun. And let me remind you, you’re paying this fee regardless of you winning, losing, or even trading these shares at all, so 17% cost of entry is the best-case scenario in this example unless your risk/reward ratio is much higher.

Next, you have to factor in the trading fees that you’ll have to pay just because you’re a short seller. Long buyers, for example, don’t get whacked with them. Entering the trade on the bullish side is completely free. That means that you can afford to be less particular about following your risk/reward ratio. You can even try scalping, which is chasing small quick profits that add up over time. Chances are, you won’t make a ton of money this way, but at least you won’t be in the negative due to the transaction fees alone. That means less pressure and a lower cost of practice. Of course, that strategy can lead to poor discipline, but that’s an entirely different conversation. 

Don’t get me wrong, I’m not complaining. It costs money to do business, and that simple truth applies to every field. However, at some point, you start questioning the costs and the rules behind those costs.

I’ve discussed my position in the video below. Check it out; I’m super curious if you feel the same way I do about short selling stocks.

Despite all the fees, I still have months when I’m consistently profitable, and I know many successful short-biased traders who are doing great. Nevertheless, all short sellers give up a significant portion of the money they work hard to make.

I’m not saying that these fees make day trading not worth it, no. All I’m saying is that you need to take them very seriously if you’re relying on day trading for your income, and you need to know about them in advance. My goal is to show you that fees need to be accounted for, and that being in the green by the end of the month on your P&L chart does not mean that you’ve actually made any money at all.

And I’ll take it even further. If you’re planning to trade full-time, you can’t set your goal at the amount you typically spend per month. Instead, you need to calculate all brokerage fees, including borrows and transaction fees, and add them to that amount. This is the real sum of money you need to generate via day trading, as opposed to the net gains you’re left with after all dues have been paid.

Psychological aspect

There is another side of selling short that I don’t hear many people talk about. Sometimes you find a ticker that fits your criteria perfectly, yet you can’t trade it because there are simply no shares to borrow. There are no shares at all, and there’s nothing you can do about it. Walking away from a sure win is the hardest thing to do, and it’s also extremely frustrating and discouraging.

If you’ve read my guide on developing a day trading strategy, then you know how much work goes into building an actionable plan. Doing research takes weeks and months. Making a customized watchlist starts days in advance. Finding the right stock is complicated, and it’s much harder than just looking up a generic list titled “10 Best Stocks To Trade Right Now”.

It takes a lot of work, time, and knowledge. Losing the opportunity to trade the perfect stock, missing out on the satisfaction of being right, and giving up the chance to make money off of your skill through no fault of your own feels unfair. 

You could decide to be proactive and borrow shares early on when they are still available. But then you’re risking too! Basically, you’re jumping into the trade before the stock satisfies your criteria. This is another way to water down your rules and get into a bad habit of entering trades that are nothing but mirages.

And if you’re not convinced that having to pay borrows affects you psychologically, think about it this way. Say, you’ve just borrowed 1000 shares at 3c/share. You’ve paid $30. Not much, right? Nevertheless, you haven’t even entered the trade, yet you’re already $30 down. That’s how the pressure builds up, and now it’s that much harder to be level-headed and approach this trade as a brand new transaction. It already has a loss attached to it, and you already want to make up for it. Queue revenge trading, an artificially induced sense of urgency, heightened anxiety, and other unhealthy psychological patterns.

Having said that all, I’m not giving up on selling short. I still do it on the regular, and I’ve learned how to be good at it. However, I’m now much more selective about the setups I trade. And of course, every year, I experiment more with going long. However, that still doesn’t change the fact that short selling is simply more expensive than going long.

I’d love to read your thoughts in the comments to the video above. Are you a short-biased or a long-biased trader? Are you happy with your choice?


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