Short Trading Vs. Long Trading

Long trading is when you buy a stock with the intention of later selling it at a higher price. Shorting stock is when you sell stock with the intention of later buying it back at a lower price. Short trading appeals to many on the basis of market cycles, in which downtrends are virtually unavoidable, falling faster than they tend to rise on the uptrend. The disadvantage to short selling is the fact that the market will eventually always swing back up, which increases the price of the stock you intend to re-buy at a lower price. Plus, not all stocks are available for shorting at all times.

For instance, you cannot short a stock on a downtick. Shorting is only possible on upticks. These rules are were established by the exchanges to prevent market sell-offs from occurring as they did in 1929, throwing the U.S. economy into a deep depression along with many other factors. Please note that specialists and market makers are exempt from this rule. One clear way to tell whether or not to sell short is by reading charts, documenting market indicators with Bollinger bands.

These are exponential bands with two standard deviations, measuring high and low volatility levels. A stock price at the top of a Bollinger band is very likely to drop down to its lower Bollinger band – A good indication to sell short.

Wide bands indicate high volatility, while narrow bands indicate the opposite. You want to monitor the moving average (MA) until it reaches a double top in the shape of an M. This is an indication of a major drop on the brink and a potential setup for selling short. What is happening is the stock in an uptrend is weakening. It reaches a high point, sells off for the slight dip, and then reaches another high. The second high point cannot break through the resistance, reaching past the point of the first high. Stockholders grow a bit nervous and begin selling off, plummeting the stock into a downward slope.

When choosing a stock for a short sell, look for steep rises. This indicates that the sharper the incline, the sharper the drop. Also, the less support a stock has, the further it will fall when the drop comes. The moment a stock penetrates the support resistance, trading at 0.125 below that mark, you need to place a limit order selling short the desired amount of shares at the inside offer price.

Here are a few don't when considering selling short: nn· Don’t sell a strong stock short if it happens to be in an uptrend.nn· If you think a stock has risen too high, don’t short a stock based on that reason alone. Many traders have a history of getting burned on such loose reasoning. Use the straight facts from market indicators to make decisive determinations in whether or not to sell a stock short.nn· Likewise, don’t ever sell a stock short simply because it takes a dip. If you’re looking for an indication that a stock may be weakening, it isn’t necessarily at the first couple of lows. Wait until it trades for a 30-minute low before you consider selling short.nn· As a new trader, you should avoid scalping shorts until you can a reasonable amount of experience. The reason for this is the risk factors are very time consuming with difficult entry points, and often very imprecise fluctuations.nn· It is unwise whether you are trading long or short, to trade a stock with very little volume such as 300, 000 daily shares.