Short Selling- Advice For Beginners

[iamnewandimproved]

Hi Guys

While papertrading, I realised that there seems to be more losing stocks than winning ones, mainly because bad news travels faster.

What advice do you have for SHORT SELLING?

Thanks in advance.

Rabsy

 

[tomorton]

Some gross generalisations in case you are new to this -

To be a consistent earner from trading you must be able to profit from a falling market.

BUT:

Stocks go down faster than they go up - it requires less courage to dump a loser than to hold on or buy.

If you go short and the price falls 50% you have made 50% of your stake as profit: the most you can make is 100%. If price runs up to 10 x your stake you have lost 10 x your stake, and so on, there is no limit to how high a price can go. Buying is the reverse: if you buy, the gains are infinite, the losses capped at 100% of your stake.

The natural tendency of the stock market is up - most indices are continually adjusted to comprise the biggest companies by market capital (which is driven up by rising share prices) - also, under-performing companies with low share prices can be taken over by bigger players and removed from the game.

More advice will no doubt turn up here soon.

 

[iamnewandimproved]

some good notes there, but i aim to have a stop loss to minimise my loss, which i will move if the share price gets lower.

i don't aim to make more than 30% return on each trade, as that is my exit strategy.

R

 

[tomorton]

Fair enough R, and good luck. Let us have a note on how you get on.

 

[Rhody Trader]

While papertrading, I realised that there seems to be more losing stocks than winning ones, mainly because bad news travels faster.

What advice do you have for SHORT SELLING?

There will naturally tend to be more down stocks than up ones in a falling market. And of course it will be the opposite in a rising market. It has nothing to do with the speed of news travelling, or anything like that. Right now the market is just a bit more keyed up to react negatively to bad news than positively to good news.

As for advice, if you intend on short selling first make sure you understand the mechanics of the market you're trading - margin requirements, loan interest rates, etc. Once you're clear on all that, make sure you employ a strategy in line with your normal trading methodology, otherwise you will probably struggle.

 

[timsk]

i don't aim to make more than 30% return on each trade, as that is my exit strategy.

Hi R,
The construction of the sentence quoted is such that it's not quite clear - to me anyway - what it is that you're saying? The inference is that you're looking for profits of 30% per trade? If by this you mean you want or expect to make £30.00 for every £100.00 traded/invested, then you'll probably be swing or position trading as such gains intra day are virtually unheard of. A 30% gain is so substantial that, to achieve it, you'll need to be prepared for a very low win:loss ratio of trades. The only way to avoid that is to utilise very wide stop losses which will involve substantial risk of a massive drawdown on your account. Depending on the size of your account and your trading style etc, most folks here would advise against risking more than 5% maximum of your total equity on any one trade. Many traders risk a LOT less than that - especially day traders. So, you can see that to enjoy a return of 30% on each trade will require a Reward:Risk ratio of 6:1.There are many good traders on these boards who wouldn't even dare dream of such returns. Not that it can't be done, but boy oh boy are you going to have your work cut out!
Best of luck and welcome to the forum!
Tim.

 

[shadowninja]

Just because a stock looks overpriced, it doesn't mean it will fall.

 

[intradaybill]

Hi R,
The construction of the sentence quoted is such that it's not quite clear - to me anyway - what it is that you're saying? The inference is that you're looking for profits of 30% per trade? If by this you mean you want or expect to make £30.00 for every £100.00 traded/invested, then you'll probably be swing or position trading as such gains intra day are virtually unheard of. A 30% gain is so substantial that, to achieve it, you'll need to be prepared for a very low win:loss ratio of trades. The only way to avoid that is to utilise very wide stop losses which will involve substantial risk of a massive drawdown on your account. Depending on the size of your account and your trading style etc, most folks here would advise against risking more than 5% maximum of your total equity on any one trade. Many traders risk a LOT less than that - especially day traders. So, you can see that to enjoy a return of 30% on each trade will require a Reward:Risk ratio of 6:1.There are many good traders on these boards who wouldn't even dare dream of such returns. Not that it can't be done, but boy oh boy are you going to have your work cut out!
Best of luck and welcome to the forum!
Tim.

Good advice! This post is a must read.

Bill

 

[iamnewandimproved]

Hi Guys

Firstly, i'm not going to be day trading, I've paper traded and a good amount of stocks i've chosen have fallen down. The majority have, some much faster than others.

30% profit is over a fortnight period rather than aiming for a quick return within an 8 hour day.

I believe there are SO MANY losers out there that its a much better strategy than betting for it to go up.

I was about to trade last week,but was told a need $2k minimum in my account. So watch this space and I'll let you know how it goes.

FYI- I'm aiing for nas stock mainly from $4-7 value

Speak soon amigos.

Rabbie

 

[shadowninja]

If you are not day trading, then try spreadbetting and you can have a much smaller account than $2k!

 

[dcraig1]

Hi Guys

Firstly, i'm not going to be day trading, I've paper traded and a good amount of stocks i've chosen have fallen down. The majority have, some much faster than others.

30% profit is over a fortnight period rather than aiming for a quick return within an 8 hour day.

I believe there are SO MANY losers out there that its a much better strategy than betting for it to go up.

I was about to trade last week,but was told a need $2k minimum in my account. So watch this space and I'll let you know how it goes.

FYI- I'm aiing for nas stock mainly from $4-7 value

Speak soon amigos.

Rabbie

I would be very careful shorting these low priced stocks. No doubt some of them have been beaten down a long way. Bear market rallies can be sharp and sudden and traders seeing value in such stocks (or traders covering short positions) can drive the price up quickly. A $4 stock can go to $10 very easily. But it is a lot harder for a $40 stock to go to $100 over the same time frame.

 

[rathcoole_exile]

I believe that bear spikes/phases tend to be quick and violent because so many Amateurs go Long and (quite rightly) set their protective Stops below their entry point (but often too tight/close)
The Pros run down the price to activate these Stops which mean the Long now has to sell, this drives the price down into the next Stops and so on until all those Stops have been quickly and ruthlessly cleaned out.
As dcraig1 mentions above, the same happens when bear markets have bullish spikes/phases - Amateurs have to cover their Shorts, effectively by "buying", thereby (albeit temporarily) driving price up.

I would suggest that mastering the psychology of Stop running - getting onside with the Pros while they routinely clean the Amateurs out, is one of the most important aspects of your successful trading career, be that Bullish or Bearish

 

[Hoggums]

timsk I'd give you rep for that earlier post but this damn new system won't let me until I rep someone else. Making a note to myself to rep you later.

 

[Hoggums]

Hi Guys

Firstly, i'm not going to be day trading, I've paper traded and a good amount of stocks i've chosen have fallen down. The majority have, some much faster than others.

30% profit is over a fortnight period rather than aiming for a quick return within an 8 hour day.

I believe there are SO MANY losers out there that its a much better strategy than betting for it to go up.

I was about to trade last week,but was told a need $2k minimum in my account. So watch this space and I'll let you know how it goes.

FYI- I'm aiing for nas stock mainly from $4-7 value

Speak soon amigos.

Rabbie

My only comment on this would be that we are in a bear market now so your strat will work easily on a bad week for the markets - do you have a strategy for when the bull market resumes again?

 

[iamnewandimproved]

My first ever SHORT SELL:

PMI is what I bought at 4.92 a few days back, its at 5.50. My plan (and ego possibly) is to wait it out for a week or two to drop to around $4.

I admit that you guys have more experience and knowledge of trading. However I have a thing about the KISS method- Keep It Simple Stupid.

I do like the advice about not buying too low as it can spike up quickly.

i'll update you guys more often on my progress. keep all advice coming though, as others can learn from it too.

let history didctate our future.



Rabbie