Selling Short (aka Shorting) is a necessary tool for traders because it allows us to profit from declining stock and index prices. In fact, almost all DaytradeTeam services utilize short selling on a regular basis. Here is a quick explanation of what short selling is all about:

"Selling Short" means establishing a market position by selling a security one does not own in anticipation of the price of that security falling. Here is an example breakdown of the process from a day trading perspective:

Trader anticipates stock XYZ will decline
Trader enters order to SELL SHORT 1000 shares of XYZ at market
Broker automatically loans Trader 1000 shares of XYZ at market
1000 share of XYZ sold at $25.00
Proceeds from sale, $25,000, held in Traders account (this money is not available for withdraw, trading or any other activity)
Trader has SHORT position of 1,000 shares of XYZ
Stock declines in price (why not make the example profitable?)
Trader decides to take profits
Trader enters BUY TO COVER order for 1000 shares of XYZ at market
1000 shares of XYZ are bought on the open market at 23.50
Cost of buying stock, $23,500, are withdrawn from Trader’s account
Stock is automatically returned to broker, giving Trader no position in that stock and leaving him with $1,500 more in account (profit)
If, in the example above, the stock would have increased in value and the Trader covered (BUY TO COVER) at 26.00, the trader would have had lost $1,000 on the trade.

REVIEW: When you SHORT you are doing the exact opposite of "normal" buy-then-sell trading. You simply sell first (Short) and buy (cover) later---you still want your buy (2nd) price to be lower than your sell (1st) price, and the difference between the two is your profit or loss. There is nothing "dirty" about this type of trading, and amateur traders' fears about short selling are greatly exaggerated; just think if you had been SHORTING the market from 2000-2002! Here are just a few securities that can be sold short:

Stocks greater than $4.50
Options
Currencies
Commodities
Futures
E-minis
Indexes (Dow, NASDAQ, etc)

To be able to sell short, you must have a margin account set up with your online broker, and you must maintain certain levels of cash in your account to be allowed to hold short positions. For more information on how to short sell in your brokerage account, call your brokerage’s customer service center.

Andy Swan is co-founder and head trader for DaytradeTeam.com. To get all of Andy's day trading, swing trading, and options trading alerts in real time, subscribe to a one-week, all-inclusive trial membership to DaytradeTeam by clicking here.