This article is for educational purposes only. Trading with leverage, margin, futures, or derivatives carries a high risk of rapid or total loss. This is not financial advice and should not be used to make trading decisions.
Short Selling With Leverage: All You Need to Know
Short selling is always done with borrowed money — and that’s exactly why leverage plays such a big role. When you short a crypto coin, a stock, or a forex pair, you’re not just betting on a price drop, you’re borrowing contracts from your broker, selling them first, and then buying them back later (hopefully cheaper).
At Leverage.Trading, we specialize in explaining leveraged strategies in plain English. In this guide, you’ll see why short selling is one of the most misunderstood tactics among retail traders, how it actually works behind the scenes, and what risks you need to know before trying it yourself.
Most traders think shorting is complicated or “too advanced,” but once you understand the mechanics, it becomes clear why professionals use it as a hedge. The borrowed money side of the trade is where most of the risk sits, so that part deserves most of your attention.
Key takeaways
- Shorting a stock, a forex pair, or a cryptocurrency has to be done through a margin account where leverage is provided by your broker to sell contracts to the marketplace.
- Short selling works by first borrowing contracts from your broker, then selling these contracts to another trader or market maker, and later buying them back. If the price has dropped you realize a profit. If the price has risen you realize a loss.
- It is not possible to initiate a short position without margin simply because there are no contracts to sell. Short selling without borrowed contracts would mean that you simply sell what you already own and that is the same as dumping your holdings. The process of shorting a position happens automatically on behalf of your broker.
How short selling with leverage works
Short selling and leverage work together by combining borrowed money and the possibility of betting on a falling market.
Every time you open a short position, in any asset class or market, borrowed money, or credit, is needed.
Credit is the borrowed money, or borrowed contracts, that you receive from your broker which can be used at different ratios.
These borrowed contracts can be sold to the market through a short position which is a speculative bet in a negative direction.
If the market falls after you open a short position, you earn a profit, and if the market rises, you lose.
Once you click the Short button on your forex broker you are borrowing contracts from the broker and selling them to a counterparty (another trader or a market maker).
Tip: You can use our short selling calculator to calculate your profit, loss, and position size when shorting with leverage.
This happens automatically and without any extra fees other than the leveraged trading fee that your broker charges for opening and closing a trade.
Suppose you are a cryptocurrency trader and you believe that the overall market is going to fall during the next couple of weeks due to elevated prices.
You decide to open an account with a crypto margin trading exchange to get the option to short-sell coins.
Your short position in Bitcoin uses a margin ratio of 1:25 and your initial margin deposit is $800.
This gives you a total market exposure of $20,000 on the short side.
If the market falls 22% over the next two weeks, the position would show a profit of about $4,400 before fees and funding costs. If the market rises 22% instead, the loss would be of the same order of magnitude and you would be close to a forced liquidation.
These examples are simplified and do not include trading fees, funding, or slippage, but they show how quickly PnL can move when you short with leverage.
Can you short sell without leverage?
It is not possible to short sell without a margin account through the use of a broker.
Each time you open a short position you are borrowing money that you don’t own to either buy or short a Stock, a Forex pair, or a cryptocurrency.
This is why every short position requires margin to function.
Without the use of added purchasing power, there would be no contracts to sell back to the market since you don’t own them yourself.
This is why every short trade is done through either a Forex broker, a Stockbroker, or a Cryptocurrency exchange, all of them offer contracts to short sell their assets.
It is not possible to short sell on a spot exchange or a stock exchange that doesn’t offer margin-traded contracts.
What does short selling mean?
Short selling means that you open a position that profits from a falling market or a price decrease.
A short position is a borrowed contract that gives you the possibility to sell a stock, a forex pair, or a cryptocurrency to another trader as a bet on falling prices.
Short selling is always accompanied by the use of credit which is when your trading platform borrows your money, or contracts, to either increase your position size, or in this case, short sell.
Short selling is counterproductive to what most traditional investors have learned where you buy a stock in hopes that it will increase in price over time.
Short sellers benefit from falling prices.
For example, Bob invests $5000 in his stock trading account and he thinks that Tesla is overvalued and will fall in price during the coming month.
Bob’s stock broker offers credit and the option to short sell.
So, Bob decides to open a short position that requires a ratio of at least 1:1.
Three weeks later Tesla has fallen 15% in value and the short position shows a profit of about $750 before costs. The same move in the opposite direction would have produced a similar sized loss.
This example shows how a short position can be used when a trader believes a stock is overvalued. It is not a recommendation to short Tesla or to use leverage for long-term investing. Shorting with borrowed stock or derivatives remains a high-risk strategy and is best reserved for traders who already have solid risk management in place.
Long position vs short position
What is the difference between a long position and a short position you may ask?
The only difference is the direction of the trade and what type of broker offers the position.
- Long position = A long position is a trade in the positive direction that aims at generating a profit by increasing prices. Long positions are offered by every broker.
- Short position = A short position is a trade in the negative direction that earns a profit when the price falls. Short positions are only offered by a broker.
A long position is the standard position in traditional finance and in trading in general which is used to invest in an asset class by buying the underlying security.
Short positions on the other hand are contradictive and are used only when the speculator thinks that the price of an asset will fall.
Short positions can only be used when margin is offered and can not be used in the spot market.
This is one of the differences between spot trading and leverage trading.
How much leverage is required to short sell?
he minimum requirement to short sell is that you trade through a margin account, often starting at an effective ratio of 1:1. You are still using borrowed stock or contracts, even when the notional size matches your account balance.
A leverage ratio of 1:1 means that you are trading the same size as your current account balance.
However, trading through a margin account allows you to borrow contracts and sell them to a counterparty.
This option is not available through a standard spot market.
The minimum amount of added funds can sometimes vary depending on what type of broker you use.
At which ratios do traders typically short sell?
Is leverage the same as shorting?
No, it is not, however, short selling can be done with both high ratios and low ratios.
A high ratio is riskier and reduces the distance to your liquidation price while a lower ratio is considered safer.
You can check your liquidation price by using our liquidation price calculator.
For example, some traders short sell with a relatively conservative ratio such as 1:3 or 1:5. Others push the risk much higher with ratios The higher the ratio, the closer your liquidation level sits to the current price, and the more experience and discipline you need to manage the position.
Choosing a leverage level should not be a casual decision. It should be based on your strategy, volatility, and a clear maximum loss per trade. Our guide on selecting a leverage ratio explains how more advanced traders think about this process.
Final thoughts
Short selling with leverage is not just betting that a price will drop. You are borrowing something you don’t own, selling it first, and agreeing to buy it back later. That agreement is what makes short selling possible, and it’s also why it can go wrong fast if the market moves the other way.
When the market drops, a short can protect a portfolio or help you take advantage of a clear setup. When the market jumps, that same position can eat through your margin quickly if you don’t control the risk. This is why experienced traders treat short selling as a tool, not as a fast way to make money.
If you decide to short with leverage, keep the ratio low, plan your exit before you open the trade, and respect the possibility of sharp price spikes. A short position that’s managed with discipline can help your strategy. A short position without a plan can damage your account far quicker than you expect.
Anton Palovaara
This article is published under Leverage.Trading’s Risk-First Education Framework, an independent learning system built to help traders quantify and manage risk before trading.
