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Stock Shorting Strategies

Shorting Stocks

Many people do not realize that you can make a lot of money when the market is falling.  Every day, stocks go up and stocks go down and only playing the upside limits your profit potential.  By mastering the 'Short Sell' Concept and you can nearly DOUBLE your gains! If you are not sure about it, try "paper trading" for a while. Write down what price you sold at and what price you "covered" at and as you get better at the mechanics, then try your first one using real money.

Short-Selling Strategies
In general, the majority of patterns that work on the long side of the market also work (in reverse) on the short side of the market. For instance just as pullbacks from new highs often present good buy opportunities., pullbacks from lows often present opportunities to sell short.

Stocks To Avoid Shorting
Just because something appears overvalued does not mean it cannot go higher. Many traders were devastated by shorting "overvalued" biotech stocks in the early 1990s (as many traders are suffering today by shorting hot sector stocks). This is not to say you should avoid hot sectors all together; it is just a warning to be cautious and realistic about the possibility of sustained stock rallies.

Short Interest
A high (or rising) level of short interest means that many people think the stock will go down, which should always be treated as a red flag for any stock purchase investment. Your best course is to check the current research and news reports to see what analysts are thinking. But high short interest doesn't necessarily mean you should avoid investing into the stock. After all, short sellers are very often wrong.

The short-interest ratio tells you how many days -- given the stock's average trading volume -- it would take short sellers to cover their positions (i.e. buy stock) if good news sent the price higher and ruined their negative bets.

The higher the ratio, the longer they would have to buy -- a phenomenon known as a "short squeeze" -- and that can actually buoy a stock. Some people bet on a short squeeze, which is just as risky as shorting the stock in the first place. The best advice is to use the short-interest ratio as a barometer for market sentiment only -- particularly when it comes to volatile growth stocks.

Summary
Shorting stocks allows you to enter the market as a seller and profit when a stock declines. Your broker "borrows" the stock from someone else's margin/short account and sells it in the market for you. As long as you buy back the shares at a lower price, you will profit.

To short stocks you must first establish a margin/short account with your broker. The stock you wish to short must be available to borrow and you must maintain at least 50 percent or more of the stock's value in your account. Also, you can sell stock short only on an UP TICK.

Professional traders sell stocks short because they know markets are prone to correction and longer-term declines. Many of the techniques that work on the long side of the market also work (in reverse) on the short side. Finally, avoid hard-to-borrow stocks and be cautious about shorting stocks in a hot market sector.