Disclaimer: The views on the posts and charts are for educational and illustration purpose only, as past performance is not necessarily indicative of future performance. They are provided for general information only and therefore should not be taken as any offer or solicitation to do any investment or trade.
Note: Non-Members are strongly recommended to sign up for the online free course to have a better understanding of the setups as discussed below:
Short Selling Through POEMS
What Is Short Selling?
Market trend can be going up, down or sideway. In a bull market when stocks prices are going up, you will buy with the intention to sell it higher. If it goes up, you’ll make a profit.
How about in a bear market? When stock prices are going down, do you continue to buy with the idea to sell it higher? Obviously, you can’t because the near term trend is down and prices are going lower.
In swing trading, dollar cost averaging strategy for the longer term is not the correct strategy to use in a down trend.
So what can you do when the market is not going up but down or sideway? Short selling is the strategy to adopt in a stock or market that is going down and even sideway.
In short selling, you sell the stock first and then buy it back later. If the price continues to go down, you’ll buy back at a lower price to make a profit. It reverses the process that people buy the stock first and sell later. This is why many people feel uncomfortable to sell short when they do not own the stock. However, you have to borrow shares first before you can sell.
Risk In Short Selling
Just as there is risk in investment, there is also risk in short selling.
1.Potential Risk Is High
The risk in short selling is high as the loss potential, in theory, is unlimited. This is because there is no limit on how much a stock price will go up when you sell short. In comparison when you long, there is a zero value when a stock price goes down when you buy and your loss is limited.
Short selling also carries a risk known as a Short Squeeze. A Short Squeeze occurs when a stock does not fall as expected and short sellers begin to buy the stock to cover their short positions. As more and more short sellers begin to do the same to cut their losses, the buying pressure will push the stock price even higher, resulting in a short squeeze to the exit door.
Advantages of Short Selling
If there is so much risk involved in short selling, why do traders still like to sell short?
1.Trading in all markets : Bull, Bear and Sideway
If you take only the long position, you can only benefit when a stock is bullish and trending higher. If you are bearish on a stock or market, you don’t trade. Many people make the big mistake of taking long position in a bear market when the trend is obviously down and hoping that price will go higher in the short term. It is like swimming against the big wave of a tsunami. A better choice is not to trade and save your ammunition for the next one good trade.
More than 90% of investors do not understand short selling and do not know how to do it. When there is a correction in the market or worse, when there is a crisis such as the collapse of Lehman Brothers in 2008, many people lose big money. On the other hand, short traders were laughing all the way to the bank.
As price action traders, we should avail ourselves with potential profits in all market types. Not just bull market, but bear and sideway markets as well.
After you have studied your chart and have a downward bias towards the stock or market, you should initiate a short position. If you’re right, the market should reward you for your right prediction when the stock goes lower in a bear market.
2.High Volatility with High Swing
Swing traders like markets with high volatility and high swings. In a bear market, many investors sell out of fear. This herd mentality can lead to a cycle of low prices going lower with increased volume. As a result, traders who sell shorts tend to reap profit during this short period of increased volatility.
Below is an example of a high volatility swing down after price broke down:
Many investors blame short sellers when their stocks go down. But short sellers provide real benefits to the stock market. They prevent prices of stocks to be bid up to rocket high and help to avoid a market bubble from forming. They hold back investors from chasing sky high prices and losing everything when the bubble eventually burst. By short selling, traders also provide liquidity to the market.
The legendary man, Mr George Soros, made a big windfall profit in 1992 by short selling against the British Pound. While we may not be like him, we certainly can add this weapon of short selling in our arsenal for profiting from a bear market or stock that is trending down
Market Structures For Short Selling
Below are 3 different market structures in which you can take advantage of the market conditions to short sell.
1. Short Sell on Uptrend Reversal
2. Short Sell on Sideway Top
3. Short Sell on Downtrend Continuation
How do you Short Sell?
Are you interested to try short selling but don’t know where to start? Below are 2 ways that you can get ready to short sell when the opportunity arrives.
1.Open a Securities Borrowing & Lending Account (SBL)
In order to trade on the short side of the market, you will have to open a SBL Account. You will need to deposit collateral into the account and the broker will charge you a fee for lending you the shares (if available) when you want to sell short.
2.Open a Contract for Difference Account (CFD)
A Contract for Difference (CFD) allows you to trade in the future market movement (up or down) of the underlying assets, eg shares, indices, commodities.
Like the SBL account, CFDs are leveraged trading instruments and are traded on margin. Some minimum margin collateral is needed to open a position and both are subjected to margin calls when markets turn against your open short positions.
A Bear As Your New Friend
In conclusion, there is no need to fear a bear market or stock that is trending down. By learning to short sell and protect your risk with our position sizing and stop loss strategies taught in our free course, you can profit in a bear market or sideway market just like in a bull market.
For more detailed explanations on how to open a SBL and CFD in Phillip Securities, please refer below:
To sign up for SBL for existing POEMS User
Login to POEMS 2.0 > Account Management > SBL > Submit Account Opening Form and Online Consent.
Read More on Securities Borrowing & Lending, click SBL
To sign up for CFD for existing POEMS User
Login to POEMS 2.0 > Account Management > CFD > Online Account Opening.
Read More on Contracts For Difference, click CFD
To receive price action setups for short selling
Sign up as client and be a member of One Good Trade , click Sign Up.
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