You want to go against the market? Beware of risk management and ego

Among traders and investors, there is a significant group of those who are unwilling or unable to open short positions and speculate only on the growth of a given investment instrument. However, apart from them, there are also traders who do the opposite.

The fact that some traders have a problem with opening short positions may seem logical at first glance. Especially for long-term investors who place their funds in, for example, stocks, shorting is impractical or technically almost impossible, so this attitude is not too surprising. For short-term trades using leverage, it doesn't make much sense anymore, but the reluctance to short can be excused here by psychological blocks or fear.

Will shorting make you money faster?

The opposite extreme is the group of traders who open only short positions and avoid long positions. One of their most common reasons is the opportunity to make big money faster on shorts, as the declines are much faster than the increases. It is true that the growth in stocks, for example, is in most cases gradual and long term, but when the price does fall, it is quite fast. Bear markets usually don't last long (relatively speaking), but they are very significant, so there may be some truth to this. One discussant on Reddit summed it up by saying that "it tends to be that short makes profit in an elevator and long makes profit on an escalator (or stairs)".

Nothing grows in the sky

Furthermore, this approach is based on the belief that nothing can grow forever. This is admittedly true, and even true for stocks, where investors most often tend to expect constant upward growth. The problem with this approach, however, is that it can be quite difficult to predict the right moment when markets will turn around and start to fall. Many unsuccessful contrarians among stock investors will attest to this because they have lost a lot of money by taking this approach.

So, if you decide to be a contrarian, or simply want to make money on shorts because they provide you with faster profits, you must expect to make quite a lot of losing trades. This can be tough on the trader's or investor's mental health, and it also requires adherence to fairly strict risk management rules. Since shorts are "faster" and more dramatic than long moves in some instruments, without Stop Losses, such investing/trading is a much bigger gamble than usual.

Watch out for ego

An investor's large ego can also lead him to open only short positions. This is because he needs to prove to himself at all costs that everyone around him who expects growth is wrong and he is better than the rest of the world with his shorts and by going against the tide. Mostly it is the younger traders/investors who have this need to prove something to themselves or the rest of the world.

It may not be conscious behaviour, but in any case it is a dangerous attitude where big egos can mean big losses. There may be a few well-known contrarians in the markets who have become well-known investment gurus due to their earnings, but they are a fraction compared to those who have lost all their money by unnecessary shorting.

Conclusion

There may be many reasons why some traders prefer to open only short positions, but none of them have rational justification. Whether it is ego, experience from the first successful trade that a trader opened short, the desire for quick profits, or something else, opening only short positions makes no sense for either short-term traders or long-term investors. But if you are already in this group of traders/investors, be prepared for the fact that it can be psychologically challenging and try to make sure that your risk management is able to handle longer periods of losses. Trade safely!