Half the time markets go up. The other half, they go down. Learn the art of short selling. In this short tutorial we will teach you how to make money when stocks go down. You will double your profits if you know how to short sell stocks. There are risks, but if you know how to mange it you will make money. This stock trading strategy is advanced and should only be attempted by stock traders who have a good understanding of technical analysis and risk management. All the methods are described in the Breakout Theory trading system. While the concept of short selling is simple, there are many elements to consider. Timing your trade correctly, and deciding exactly when to make the trade is everything. This involves a deeper analysis of the price action of a stock.
Stock Trading Strategies
Short Selling Definition
Short Selling or “going short” on a stock trade, or “shorting” a certain stock is the act of profiting from stocks that are going down in price.
The mechanics of short selling is a little bit more complicated to understand. Essentially you borrow shares from a broker and sell it in the open market. When the price of the stock goes down, you buy the shares back at a lower price. The difference between the selling and buying price is your profit. For detailed mechanics click here.
Risk is UNLIMITED and DANGEROUS
Most traders don’t understand this. Short selling can destroy your account if your are not careful. When we normally buy stocks, the maximum risk will reduce our account value to $0, because the lowest a stock’s price will go to is $0. However, when we short sell stocks, and the price of the stock goes up, we lose money. The highest a stock’s price can go is unlimited. So theoretically our risk is unlimited when short selling.
There are a few safety measures that your broker has implemented, like having a margin requirements and minimum account size. If your account size drops below a certain level you may receive a margin call. You may be required to deposit more funds to hold a losing short position. Your broker may force you to sell if you don’t meet margin requirements. If you get a margin call, your trading strategy needs to seriously be investigated. Never deposit more money for a losing position. It’s best to liquidate your position and start with a fresh strategy.
To prevent ruin and manage risk like a pro, refer to Phase II of the Breakout Trading Strategy. Learn how to implement a precise plan of action. Risk is a combination of many factors like account size, position size, and the stocks volatility. All these factors are partial to one another in controlling and quantifying risk.
How To Short Sell Stocks Like A Pro
Short selling stocks requires the understanding of a few concepts. You need a technique or a system to consistently make money short selling. The fast paced action of short selling stocks can catch a novice off guard. You must be alert and ready with a strategy. Traders who are good at short selling stocks have a deep understanding of market dynamics. In the next few paragraphs short selling concepts will be explained. The guide lines listed below are rules that one should not break. These techniques take into account factors that will increase probability of a positive outcome. A rigid framework is needed to make stock trading as precise as possible.
Sell Short Fundamentally Bad Stocks
When we buy stocks, we want a company that is showing financial “growth”. When we are short selling stocks, we are looking for the opposite. The ideal candidate would be a company whose growth has slowed down after a period of time. There are many scenarios that can cause a company’s financial situation to deteriorate. The amount of competitors in a certain industry, or laws that can affect sales. The key is to keep an eye on EPS Growth rates and Quarterly growth rates. It’s also a good idea to keep an eye on the growth rates of the sector’s these stock belong to. Much of this information can be found on Yahoo Finance or Google Finance free of charge. When short selling stocks you want as many factors in your favor.
Short Selling Should Only Be Done in A Bear Market
You want market conditions in your favor. A bear market should be apparent when short selling stocks. Not necessarily a the market as a whole, but at least the stock’s technical situation should dictate if it’s is a bearish stance. This is done from a technical perspective. Moving averages should be in a bearish mode on the indexes, sectors, or the stock itself. Trend lines should also indicate an impending downtrend. There are instances when shorting stock during a bull market is ok, however in terms of the “law of large numbers” in the long run breaking this rule will only hurt you. Having the bear market on your side when short selling increases the probability of success.
Short Selling Should Be Technical
In a strategy where risk of ruin is very high, you need a strategy that takes the emotion out of the trade. Entry and exit points are always plotted. When short selling stocks, you should use stock charts to assess the proper information for a successful trade. Taking a technical approach to trading and using Breakout Theory Risk Management tactics, the precision and control you have is increased. The outcome is never in question. Losses and profits are quantified exactly to keep you within risk profile that is profitable in the long run.
Short Selling Tutorial Example
Click on The Topics Below To Learn Concepts
Moving Average – You want to make sure the moving average in a bearish phase. This increases your chances of a profit. The the stock’s 50 day Ema must be below the 200 period ema. As you can see in the chart above this is the case. The green line is below the red line. This is a powerful signal to sell short.
Chart Patterns – Aropostale (ARO) Has been in a trading range and forming a wedge chart pattern. As you know, when short selling stocks, chart patterns produce a higher probability of a breakout. These patterns are areas of consolidation with volatility calming down up until the breakout. Chart patterns increase your odds when short selling.
Support and Resistance – The breakout happens as soon the lower support line forming the wedge has been breached. When this happens this is the moment which you will start short selling. Support and resistance has always been crucial in find the correct moment to sell short.
Stock Volume – Do you see the volume spike as the price crosses below the support line of the wedge chart pattern? Volume has always been a key technical indication of a trend change. It’s always best to go with the breakout when shorting stocks.
Average True Range (ATR) – Prior to a breakout of the chart pattern do you notice that volatility has significantly decreased compared to the last high breakdown price. It’s important to note that when short selling the breakout, make sure volatility has calmed down a bit. During low volatility periods your
Technical Analysis – The tactics used here for short selling are always technically based. Breakout Theory’s technical analysis indicators are the best combination to use when short selling. It tells you exactly when to buy, and when to sell. No second guessing if you should start short selling a particular stock.