Short selling
How can a trader make money when an asset falls, by selling something they do not yet own?
In plain words
Short selling means selling an asset first and buying it back later at a lower price, keeping the difference. The trader borrows the asset (or takes a short futures position) to sell it, so the profit equals the price fall, minus costs.
Why it matters
Shorting lets risk be taken on a decline as well as a rise, and it can hedge an existing long position. But losses are theoretically unlimited if the price rises, and borrowed positions carry financing costs and forced-buyback risk, so sizing and stops matter.
In a real week: ETH, week of 24 February 2020
In the week of 24 February 2020, ETH opened at 274.50 and closed at 217.81, a fall of 20.65%, with a low of 210.00 on Thursday 27 February at 01:00 UTC. A short opened near the weekly high of 277.20 would have profited from the decline, while positive average funding of 0.0362% per eight hours would have paid that short. The close sat in the lower third of the week range, and volume was above its prior 12-week average, after four up weeks.
A common mistake
Assuming shorting is the mirror of buying. Losses can grow without limit as the price rises, and margin calls or forced buybacks can end a position before the hoped-for fall arrives.