Falling Markets Drive Global Rise In Short-Selling Strategies In Q2

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Capital.com’s short-position traders were 32% more profitable; FX, oil and indices proved popular among short-sellers

Rise In Short-Selling Strategies

LONDON, UNITED KINGDOM, 27 July 2022 – According to the latest Pulse report published by trading and investing platform Capital.com, 38% of its traders carried out short-position trades on the platform in Q2 2022. This was 34% higher compared to the previous quarter and marks the highest number of short sellers on Capital.com since Q1 2020. The significant rise in short-position traders—a strategy that enables traders to try and profit from falling asset prices—comes amid a backdrop of declining markets.

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The findings were revealed in Capital.com’s quarterly report—Pulse— which tracks the trading patterns of retail investors across all markets it operates in. Over 6 million people have opened an account on Capital.com.

According to David Jones, Chief Market Strategist, Capital.com, the rising number of short-position traders in Q2 points to a shifting investor mindset as markets turn more bearish.

“As a general rule, self-directed traders and investors seldom short-sell. They are so used to buying first and selling later that it's psychologically very difficult for them to come out of this way of thinking. Our findings show there has been a sharp rise in clients short-selling in Q2, which shows just how significant the drop in many markets has been. This may have forced many retail traders to change their mindset.”

The Pulse report further showed that the highest proportion of short trades came from the UK, Africa and Asia (41%). While the lowest proportion of short trades was seen in Australia (34%). 

“One thing that is interesting is the slightly less short-selling activity by Australian clients.  One explanation for this could be the relative resilience of the Australian stock market index this year. The Australian ASX 200 index only started falling in May - it had been volatile but broadly sideways for much of the year since then.  Perhaps Australian clients felt somewhat insulated from the market meltdown that was underway in most other areas of the world, so have come to short-selling a little later than those in other regions,” added Jones.

In addition to the rising number of short trades, the report also found short-selling to be slightly more profitable (32.1%) than long-position trades (28.7%) during the period. 

“The ability to sell-short could well have an impact on traders' overall profit and loss.  This could be particularly true if we enter a period of prolonged weakness in markets, where investors stop being rewarded for just blindly buying the dip. Using sensible risk control measures such as stop losses in tandem with short-selling could be a prudent addition to a trader ‘s overall strategy,” said Jones. 

FX, Indices And Commodities Were Most Shorted In Q2

The Pulse report also revealed that foreign-exchange markets were heavily traded in the last quarter, with traders around the world shorting the US dollar’s prospects against other currencies, particularly the Japanese yen. In all regions except the UK and Africa , the US dollar versus the Japanese yen (USD/JPY) was the most traded currency pair.

“Bank of Japan (BoJ) governor Kuroda has remained steadfast against tightening monetary policy as inflation is benign in Japan compared with the US, where the Fed has embarked on its aggressive rate hike cycle. However, the Fed's well-signposted future rate hikes are likely priced in by markets. Any future hawkish pivot from the Bank of Japan, therefore, could drive the yen higher in the coming months, and finally put some pressure on the US dollar,” noted Jones.

The other two most shorted markets in Q2 were commodities and indices.  Shorting the Nasdaq (US100) proved more profitable in Q2, recording a higher percentage of profits (33.7%) than long positions (32.6%).  

“Buying the dips was a very profitable strategy through much of 2021 - but it has of course been a different story this year with the NASDAQ 100 under pressure for much of the year so far. The index had a strong bounceback towards the end of March - but once again this rally hit the buffers, and the index lost 22% in the second quarter. Perhaps those traders who had been trying to buy the dip in the first quarter - and getting their fingers burnt - decided to throw in the towel and join the short sellers in the second quarter. The NASDAQ 100 did show the tentative signs of trying to form a base during June which should make for an interesting third quarter as the battle between the bulls and bears continues,” said Jones.

Across commodity markets, oil was the most shorted during the period. In Q2, 41% of all oil CFDs traded on the Capital.com platform globally were short, up from 35% in Q1. 

“It is perhaps not too surprising that more traders have been taking the view that the market may have become overheated. Oil has rocketed more than 500% from its lows in April 2020 and the global commodity index (S&P GSC) has more than doubled its value. At its peak this year, following the Russian invasion of Ukraine, oil was up 70% for the year to date - and this was before we were even three months into the year. 

With short positions in oil climbing, perhaps traders are expecting benchmark crude oil rates to drop over the next three months. If inflation continues to pressurise the world economy then that could further feed through to weakness in the oil price,” added Jones. 

The Pulse report captured data on all executed trades on the Capital.com group platform between 1 April 2022 and 30 June 2022. For additional trading data and retail investment trends, you can view the complete Pulse report here.

About Capital.com 

Capital.com is a high-growth investment trading group of companies empowering people to participate in financial markets through secure, low-friction, innovative platforms that take the complexity out of investing.

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