Short Selling in Prop Firms: Why Some Prohibit Them

Why Short Selling Is a Risk for Prop Firms

Short selling—selling assets you don't own, hoping to buy them back cheaper—is a powerful tool, but it also generates volatility and unlimited loss potential. For a prop firm, every trade opened is capital at stake. When a trader opens a short without a clear stop loss, the theoretical risk is infinite: if the price rises indefinitely, losses have no ceiling.

This is the main reason many funded accounts prohibit shorts or allow them only under strict rules. A prop firm that invests capital to fund an account assumes the risk of your trade; if you lose big fast, they lose. Leveraged shorts are especially dangerous because a sudden spike can liquidate the account in seconds.

Not all firms are the same. Here's what you'll typically find:

• Total prohibition: some challenges don't allow shorts under any circumstance. It's safest for the firm, but more limiting for you.
• Prohibition on certain assets: it's common to allow shorts on forex (currency pairs), but not on stocks or indices.
• Shorts with mandatory stop loss: the firm allows shorts, but requires you to close with a loss if the price rises more than X pips or percentage.
• Position size limit on shorts: some allow small short positions but not large ones.
• Prohibition during high-impact news: many accounts block shorts during important economic announcements to avoid destructive gaps.

When you connect your account to Onyx Trading Live, the Guardian (risk manager) automatically respects these limits if you configure them: you can mark which symbols to allow, what maximum size to accept, and what trailing or stop loss rules to apply.

Impact on Your Trading Strategy

If your trading system depends on frequent short selling, a restrictive prop firm may not be for you. But that doesn't mean you can't trade: it means you need to adapt your approach.

First, the obvious: if the account allows it but with limits (shorts up to a certain size, with mandatory stop loss), respect it. Risk management in funded accounts is not an obstacle; it's the door to recurring funding. If you follow the rules, the firm re-funds your account month after month.

If the firm totally prohibits shorts, you have options:

1. Long-only trading: focus on buys. There's substantial volume in bull markets; many profitable traders operate buying only. 2. Switch pair or asset: if shorts are banned on stocks but allowed on forex, move to currencies. 3. Find another firm: not all props are alike. If shorts are critical, choose one that allows them. 4. Use options or spreads (on some brokers): buy puts or create call spreads without selling the stock directly (if your broker allows).

How to Minimize Risk in Short Selling

If your firm lets you short, do it with discipline:

• Tight stop loss: no negotiating: if the short rises X pips, close the loss.
• Small position size: shorts tend to be more volatile; use a smaller lot than your longs.
• Avoid shorting on news: high-impact economic news triggers gaps. Don't short before major data.
• Know your maximum drawdown: if your firm allows shorts but you have a daily loss limit, size accordingly.
• Monitor in real time: unlike longs, shorts can explode fast. If you can't watch the screen, don't open one.

Alternatives If Your Strategy Relies on Shorts

If the short is the soul of your system, don't despair:

• Find props that allow shorts without restriction: they exist. Read their rules before joining.
• Start in demo: test your strategy in the prop's challenge (simulated) account. If the challenge bans shorts and your plan fails without them, don't pay for the funded account.
• Diversify assets: if shorts are forbidden on stocks, but allowed on currencies, learn forex. The forex market has volume and movement for scalpers and swing traders.
• Create a long-only plan B: have a version of your strategy using only longs so you can trade on any account.

The Balance Between Restriction and Funding

The key is accepting that props are not retail brokers. They fund your account because they want you to win consistently and in a controlled way, not make one heroic trade. Restrictions (including on shorts) exist so you can last in the long run and prove your skill.

Passing a prop firm challenge is not just technique; it's mindset. If your strategy only works with unlimited shorts, it's probably speculation, not trading. Long-term profitable traders adapt to the rules.

When you connect your account to Onyx, you'll configure which symbols you allow and what risk controls you use. The Guardian will make you comply with rules automatically: no emotional decisions, no surprises. So you can focus on what matters: the trade.