Adrian Reid answers how to trade stocks both long and short. He stresses that while most brokers allow long trades, shorting requires a broker and usually a margin-enabled account; examples mentioned include CFD brokers and Interactive Brokers with portfolio margin. Short selling has asymmetrical risk/return (limited profit vs. unlimited loss), so you need a dedicated, well-backtested short-selling system (ideally 500–1,000+ trades of evidence) and strict risk controls (small positions, low leverage) to survive rare but severe events like takeovers or sudden price spikes.
How can I trade stocks in both directions, long and short? What do I need to do and how do I set myself up to trade long and short?
Well, in order to trade, basically any broker is going to allow you to trade long. So let's focus on the short side. The real question is how can I diversify the long side and actually trade short as well? You just need, the first thing is you need a broker that will support shorting. And that could be, if you're in Australia, that could be. Most CFD brokers layer to short. I don't actually trade CFDs, I prefer to trade stocks. I use interactive brokers and I have a margin, a portfolio margin account which allows me to short basically, you know, any stock that's approved for short selling. So you need, the first thing is you need a broker that will allow you to short in your market. So check with your broker. If it's a standard kind of mom and pop broker, they may not support it. You may have to move. I like interactive brokers because they allow me to trade pretty much any market in the world. And shorting is very easy. They've got a pretty pretty, you know, powerful platform and, and the actual mechanics of doing short trading is dead easy. So you need that. But that's not the main thing. The main thing is to realize that shorting is actually very different than the long side. And so to diversify and not just trade long, also trade short, you need a short selling system that actually works and actually keeps you safe because the risk return profile on the short side is quite different than on the long side. Okay, on the short side, if you short sell a stock at $10 a share, the best you can do is it goes to zero. So you can make $10 a share, but the worst you can do is it could go to $100 a share. So the risk return is asymmetrical. On the long side, it's the other way around. If you buy a stock at $10, it can only go to zero, but it can go to 100 or 1000 or whatever. Right? So short selling systems that work are quite different and also frankly much harder to find. So give yourself some time and learn about short selling systems that actually work. Certainly backtest it and make sure you've back tested it thoroughly.
The challenge with shorting is there hasn't been that many bear markets. So there's typically much less data available to backtest on. Like yeah, okay, we had a bit of a bear market in early 2020. We had a bear market back in 2008, nine was a bear market in 2000, 2001. But they're only small slices of time. So you want to make sure that your short selling system is very stable, works pretty consistently over time. And don't base your decisions to trade a system on a couple hundred trades. You need at least 500 or 1,000 trades in your backtest to know that it's really profitable and what could happen. So give yourself some time to learn shorting. And again, in the trade success system, I've got a bunch of good shorting systems which really help. You can add them to an existing portfolio, work on them yourself, it's a good place to start. But you need a system that is profitable on the short side. And I can't emphasize enough, you've got to be far more careful on the short side. Once you've got a system, you need the risk control to keep you alive. Because when things go wrong, when you're shorting, it's much uglier than on the long side. Yes, on the long side, your stocks can fall very quickly. But if you're short a stock that has a takeover announcement against it, all of a sudden your, your, your neck deep in losses. So you got to make sure that your risk control is pretty tight, your positions are small, you don't use a lot of leverage because it can get nasty pretty quickly. So in order to trade short, need a broker that supports it. You need a system that's profitable, that you're able to follow, and you need the confidence to follow that system and the risk control to keep you alive while you're doing it. It.
