chapter 5 high-probability shorting

One of the most closely guarded secrets of electronic day trading is

how to successfully short a stock intraday. Unfortunately, the information

on this subject is almost nonexistent. Without the knowledge

of how and when to short a stock Intraday, success as a day

trader or short-term trader will be much more difficult to achieve.

Making money in downtrends is a completely foreign concept to the

vast majority of people. Most people don't understand that you can

make money faster when the stock market goes down than you can

when it goes up. Not understanding how to make money in a strong

downtrend seriously handicaps your ability to compound capital

and limits your options. After all, the market doesn't always go up,

does it? In fact, markets tend to drop an average 67 percent faster

than they rise. The problem is that stocks tend to trend upward. To

make money shorting, you have to know when a stock has a high

probability of beginning its downtrend and where the downtrend is

likely to reverse. To complicate matters further, you need to understand

the long-term technical picture of a stock, the market, and the

sector to make consistent high-probability intraday trades.

To become a success in shorting (or short selling) requires you

to become a true master of the game. You must be in tune with the

trend of the market and be able to use technical analysis to scrutinize

the specific stock you plan to short. You must know the fundamental

picture of a company before you short it if you plan to hold the

stock three days or more. If you plan to hold a stock longer than one

day, never short on technical analysis alone. An understanding of

both fundamental and technical analysis is necessary if you are to be

successful shorting stocks. I know of cases where traders went short

because of technical analysis while holding stock overnight only to

have to cover the short position a few days later for a large loss. If

you are shorting stock intraday using ECNs (Electronic Communications

Networks) and trading electronically, the fundamental picture

is not as critical, because you plan to be out of the position before

the end of the day. If you know of fundamental weakness, it makes

the case for shorting the stock more compelling. Before we begin to

examine the techniques of intraday shorting and trading electronically,

let us first learn some basic information about selling short.

One of the most closely guarded secrets of electronic day trading is

how to successfully short a stock intraday. Unfortunately, the information

on this subject is almost nonexistent. Without the knowledge

of how and when to short a stock Intraday, success as a day

trader or short-term trader will be much more difficult to achieve.

Making money in downtrends is a completely foreign concept to the

vast majority of people. Most people don't understand that you can

make money faster when the stock market goes down than you can

when it goes up. Not understanding how to make money in a strong

downtrend seriously handicaps your ability to compound capital

and limits your options. After all, the market doesn't always go up,

does it? In fact, markets tend to drop an average 67 percent faster

than they rise. The problem is that stocks tend to trend upward. To

make money shorting, you have to know when a stock has a high

probability of beginning its downtrend and where the downtrend is

likely to reverse. To complicate matters further, you need to understand

the long-term technical picture of a stock, the market, and the

sector to make consistent high-probability intraday trades.

To become a success in shorting (or short selling) requires you

to become a true master of the game. You must be in tune with the

trend of the market and be able to use technical analysis to scrutinize

the specific stock you plan to short. You must know the fundamental

picture of a company before you short it if you plan to hold the

stock three days or more. If you plan to hold a stock longer than one

day, never short on technical analysis alone. An understanding of

both fundamental and technical analysis is necessary if you are to be

successful shorting stocks. I know of cases where traders went short

because of technical analysis while holding stock overnight only to

have to cover the short position a few days later for a large loss. If

you are shorting stock intraday using ECNs (Electronic Communications

Networks) and trading electronically, the fundamental picture

is not as critical, because you plan to be out of the position before

the end of the day. If you know of fundamental weakness, it makes

the case for shorting the stock more compelling. Before we begin to

examine the techniques of intraday shorting and trading electronically,

let us first learn some basic information about selling short.