Trading 101

Article #7: Shorting a stock

The short selling is widely spread technique, and it is preferable by many traders because the movements are more massive and quicker. Based on that many traders are looking to short sell different type of securities in searching for an immediate and substantial profit. However, a lot of people does not understand the specifications of the short selling which cost them a lot of problems and even big loses. That’s why in this article I have decided to give a quick overview of the specifications of the short selling and also several advises for beginners.

The main problem that appears is that for most people it comes more natural to “go long” buy stocks and when they try shorting, often some people don’t know what to look for.

• The first and of course the most important indicators is the graph. When you check what is the general trend because it is not uncommon to see a stock that has been in a downtrend and it is continuing to trade in the same pattern for an extended time. There are also different chart formations which give alert to the traders that the trend might turn or it could continue. Furthermore, some indicators are used to define the directions on the securities as well. For example, the primary indicator as the moving average can also be used to predict downtrend. If the price break below the 200-day moving average, typically the declines continues.
• Second, comes something that I mentioned in my previous article and it is when a company misses its quarterly earnings estimates. As I explained in more details, the management will try to explain to the investors what happened in a conference call or press release. The more experienced traders will often try to short the stock in between the data release and the time is going to take the analyst to make the report.
• The third is the tax-loss selling. Sometimes you might observe that companies in the bottom of their 52-week trading, price breaks the range and goes even lower. This is caused by individual traders and mutual funds that want to book some of their losses before the end of the year to reap the tax benefits. Which means that these types of stocks are excellent opportunity for traders aiming to benefit from downwards sloping movements at the end of the year.
• Forth comes the signs of insider selling. There might be several reasons why an insider wants to sell his shares. It might be purchasing of something or merely desire to book some profit. This is hard catch by an ordinary trader without inside information. However, if a number of insiders are selling the stock in large quantity, this will shift the price, and you can try to follow the selling pressure and time you short sale accordingly.
• Fifth is to look for companies that are going worse as fundamentals. To succeed in shorting these stocks, they don’t have to be on the edge of bankruptcy. Sometimes for the big investors such as mutual funds is enough to see only small deterioration in a company overall fundamentals to get fed up and dump the shares.
• And last but not least comes the declining sector trends. Most companies within a given sector or industry are trading in relative parity. Which means if supply or demand issues faced one of the companies in the industry it is very probable this to impact the others as well. You can use this information to your advantage and try short sell the stocks that are lagging behind the drop.

Those were some of the main steps which a beginner trader can follow in order to improve his or her ability to short sell stocks. I hope it was useful for you and it will help you to increase the number of your profitable positions.

Written By Valentin Fetvadzhiev

25.04.2018