By Taro Hideyoshi
Before go to the strategies, please allow me reviewing what short selling means.
When you buy stock, it implies you believe that the stock’s price is going to rise. Conversely, when you go short it implies that you are anticipating a decrease in stock’s price.
In futures, commodities or forex, you are able to choose whether you want to go long or go short since you are dealing with contracts. Short sell stock, in the other hand, is selling of a stock that you do not own.
When you short sell a stock, your broker will lend it to you. Sooner or later then, you must “close” or “cover” the short by buying back the same number of shares to return them to your broker. Generally, you need margin trading account in order to sell short.
You will gain profit if the price drops, so you can buy back the stock at the lower. By the way, if the price of the stock rises, you will lose money since you have to buy it back with the higher price.
Basically, a strategy for selling short is to sell short when the chart pattern indicate a price reversal. For swing traders, they will sell short when the price reach its resistance levels. The stock that its price raises steeper in uptrend, the steeper falls when it is in downtrend.
You can still use the same indicators that you use to buy a stock for short selling. But you have to reverse the reading. When you sell short, you want all indicators showing weakness.
For example, you have to look for declining of moving averages and overbought oscillators. Also for the volume, you have to look for the stock that is falling with strong volume.
Here is the trigger list for short selling.
1) Market conditions are negative
2) Poor company fundamental
3) Industry is in downtrend
4) The price has formed a reversal pattern
5) Strong volume when the price breaks down
6) The price is traded under moving averages and is not able to penetrate them
7) Oscillators indicate overbought conditions
Like buying a stock, you also need to set your stop loss for your short selling. When you place stop for short selling you have to place it above the entry price. You may place it few ticks over previous resistance, or place it few ticks above highest price of the day if you are swing traders.
Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.
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