Registered User
Joined: 9/30/2006
Posts: 317
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Any recommendations on a book or course on shorting stocks. I'm new to shorting and want to learn techniques and issues.
Thanks
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Registered User
Joined: 1/28/2005
Posts: 6,049
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There may be books that can tell you how to short stocks. If it will be
successful is another story.
(remember there are books that tell you: "How to win in a casino")
I have spent many years analyzing trading systems and methods.
I think its wise for the beginner to stay away from the short side of the
market. At least until they have more knowledge and experience.
I will give you my thoughts on the subject.
1) Short trading is not simply the inverse of long. It has its own character.
2) Even though it would seem bear markets offer shorting opportunities.
Its is not that simple.
3) Under bear conditions the beginner should consider going to cash/bonds.
4) Even though there is a bear market many stocks can still go up. Allowing
you to still trade long. (if you have the experience)
APOL, BLL, AZO, and SLM, are some of the stocks I was focused on during
the 2000/2003 bear market.
5) If shorting is to be successful it probably works best in short term counter-trend
mode or as part of a spread in pairs type trading.
6) Dynamic asset allocation is probably a more effective strategy using
stocks, bonds, gold, commodities. Then a simple long/short scenario.
7) Its possible that in the future ETF's such as: QID, MZZ, MYY, SDS,
PSQ, DXD, DOG will allow for more successful shorting strategies but for
now the jury is out.
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Thomas Bulkowski was interviewed in TASC. They asked him why he
only traded long:
Quote:" A study I conducted using nearly 12,500 chart patterns found
that you make more money going long than you can going short. I always
thought you'd make more money shorting in a bear market, but my research
shows that's not the case"
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Thanks
diceman
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Registered User
Joined: 3/25/2005
Posts: 864
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QUOTE (diceman)
1) Short trading is not simply the inverse of long. It has its own character.
Sorry Diceman, but I have to disagree with this to a certain extent.
Shorting, for the most part, is the inverse of going long.
It's no different than buying stocks on margin.
If the trade goes dramatically against the trader in either case then, the trader will get a margin call.
So, if a trader is afraid of using margin then he should stay away from shorting. Otherwise, many so-called experts out there will tell you that you have more chances of making good money when a stock is going down than when it is going up. And, when picking individual stocks to short, it doesn't matter whether you are in a bear market or a bull market.
Side Note: Many short sellers look for opportunities in stocks that run up quickly because what goes up must yield to profit-taking at some point -- which causes the stock to retrace.
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 Gold Customer
Joined: 12/7/2004
Posts: 4
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A few more things on shorting (from my experience):
facts
- the most you can ever make is 100%, you can loose infinity (if you don't enforce buy/sell rules of course)
- if you are short a stock and it pays a dividend, YOU pay the dividend (your brokerage will deduct it from your account on the ex-dividend date)
opinions
- short stocks with low Short Interest Ratio's (i like lower than 2) keeping in mind that stocks with high ratio's have a lot more shorts needing too cover (which turns them into buyers making the stock go up)
- look for stocks bumping up against major averages from below. if they fail to go back through, they are good shorts.
- don't overstay. shorting is more profitable if you take quick 10-30% gains versus waiting for bigger gains over a long time. shorting is not a buy and hold game.
- strictly inforce stops and protect your gains with trailing stops
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Registered User
Joined: 3/25/2005
Posts: 864
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QUOTE (fjames3)
- don't overstay. shorting is more profitable if you take quick 10-30% gains versus waiting for bigger gains over a long time. shorting is not a buy and hold game.
- strictly inforce stops and protect your gains with trailing stops
Agreed. I am mostly in this camp.
QUOTE (fjames3)
- short stocks with low Short Interest Ratio's (i like lower than 2) keeping in mind that stocks with high ratio's have a lot more shorts needing too cover (which turns them into buyers making the stock go up)
Personally, I don't concern myself with excessive short interest on a stock. I am just not in the trade long enough to worry about this.
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Registered User
Joined: 11/1/2005
Posts: 240
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Wyckoff through SMI is a great course for trading, shorting is taught as a way of trading. one should use shorting as easy as long trading. it bring out the point a stock is ready to short when it move up is over, and a long buy can be used to cover your shorts.(shorts as in stocks, jeans do the same?)
I had to pratice for a couple of trades, now its as easy as buying long, not on the exact top/bottom as wyckoff teaches.
there are several books with information also.
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Registered User
Joined: 12/19/2004
Posts: 457
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Although I like Bulkowski's books very much, I have to disagree with him about short selling.
He did his research during the 1990's--a roaring bull market with lots of liquidity provided by the Fed and the BoJ. Such circumstances are very unusual, and made it very difficult for shorts to profit, although there were a few pros who made money shorting, even during the 1990's.
A complete trader is able to profit from both sides of the market. If you can only profit from the long side, there is something wrong with either your strategy, or your mindset. Stick to long term investing.
There ARE some differences between the long side and the short side. Because the masses who make the market are typically look to buy before they sell, there is an upward bias to stock prices. You might say that bullish info is incorporated quickly into stocks, while bearish info might not get factored into the price for quite awhile.
The positive side of short selling--you can make your money much more quickly, and turn your capital over. You don't need to hold a position for as long if it works out well.
Stocks drop much faster than they can go up. In the unlikely event you manage to get a short that does go to zero, you make 200% on your money, because you are using leverage. If you short, a stock that drops 10% in a quarter, you make 20% because of the leverage. Of course, this can work against you if you do not manage the inevitable losses.
Some things I consider when shorting:
1. It is helpful if you have some fundamental or economic reason for the short. This takes some of the risk out of shorting based strictly on technical factors.
2. It might be wise to consider short sales trading positions, where you select the dominant trend, and then try to sell short term strength, and then cover when the stock looks oversold. With long trading, it is a bit easier to get in after breakouts. With shorts, that is a risky propisition.
Some books to consider:
Art of Short Selling: Katheryn Staley. A good book on short sales from a fundamentalist perspective.
How to make money by selling stocks short: Bill O'neil. A book of charts for profitable short sales from a technical POV. Some don't like just a book of charts, but I think this is a great way to train someone to see the patterns technicians look for.
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Registered User
Joined: 1/28/2005
Posts: 6,049
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rmr
Quote:"He did his research during the 1990's--a roaring bull market with lots of liquidity provided by the Fed and the BoJ."
I'm glad he got in touch with you to go over his testing.
You can make your assumptions but to me the statement:
"I always thought you'd make more money shorting in a bear market, but my research
shows that's not the case"
says he tested bear conditions to.
(this article was after the 2000 bear market)
How could you determine how shorting works in a bear market and only look at
a bull market?
Surly you give him more credit than that.
--------------------------------------------------------------------------------------------------------
My trading analysis was purposely focused on the 2000/2002 bear market.
I was shocked how little shorting brought to the table. I would take a guess
that anyone who is really successful at shorting is holding positions less than
10 days.
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Also lets take your statements at face value. (shorting does not work in bull markets)
(we will assume Bulkowski tested in the "wrong" market environment)
That would imply that you couldn't have shorted during the 90's and 80's.
(only the crash of 87 and 2000/2002 not exactly a robust system)
It would also imply that shorting is not simply the inverse of long. The market
does have a bias that is against the short seller.
(since we have years where it was not wise to short vs. months
that it was)
All this evidence is why I believe the starting trader should master the
long side first and only investigate shorting when they have a lot of experience.
Thanks
diceman
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Registered User
Joined: 12/19/2004
Posts: 457
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Diceman,
You are certainly entitled to your opinion, but I'm simply going to disagree with you.
I was shocked how little shorting brought to the table. I would take a guess
that anyone who is really successful at shorting is holding positions less than
10 days.
Why I don't put too much stock in Bulkowski's stats:
1. He analyzed a rather small span of time, so his conclusions don't impress me all that much.
Keep in mind, if he had done the same study during the 1974 bear market, the conclusions would have been just the opposite. The vast majority of stocks dropped during that time.
2. My experience during that time tells me just the opposite. I recall during the bear market that there were numerous stocks that had extended downtrends which would have been very profitable shorts. These stocks, suffice it to say, are not in the Worden database anymore. Perhaps you could find them in the pink sheets now.
This is my experience going through thousands of stocks, over a period of 2 years, in real time, not doing a mechanical study, after the fact.
Depending on when he did his research, his database may suffer from survivorship bias, which would grossly underestimate the returns to short sales.
3. Extrapolating results from historical backtesting is a practice fraught with difficulties. Markets change, traders learn and adapt. The Elliott Wave concept of alternation suggests to us that we should not expect patterns to repeat exactly. Situations from prior market cycles hardly ever repeat the same way.
All this evidence is why I believe the starting trader should master the
long side first and only investigate shorting when they have a lot of experience.
A trader will never get the experience unless he goes out and does it. There comes a point in time when you just have to go out and test yourself.
Of course, that doesn't mean putting on a huge position in one stock. If a trader puts on a small short position of 100-200 shares, with a reasonable stop (or uses options for protection), there is little reason to believe a short position has the infinite risk most associate with it.
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Registered User
Joined: 1/28/2005
Posts: 6,049
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rmr
I have to admit I don't really understand your comments.
Realize that my points have been short selling is not simply the inverse
of long-trading and short selling probably requires a different skill set and
is probably more effective in the short term.
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Quote:"1. He analyzed a rather small span of time, so his conclusions don't impress me all that much."
Quote:"Depending on when he did his research, his database may suffer from survivorship bias, which would grossly underestimate the returns to short sales. "
If we have to show so much concern over when and exactly how he tested.
You are proving my points.
(not to mention you conveniently conclude that he used the wrong methods and
wrong time. Since he retired in the market through real trading. I give him
more credit than that. )
(I believe that since he's been trading he tests his data in real-time and does not
back-test)
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Quote:"Keep in mind, if he had done the same study during the 1974 bear market, the conclusions would have been just the opposite. The vast majority of stocks dropped during that time."
So we have to go back 32 years to a market debacle to prove this works?
Once again you prove my points.
I would assume the great depression was the last time it worked before that?
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Quote:"Depending on when he did his research, his database may suffer from survivorship bias, which would grossly underestimate the returns to short sales."
Nevertheless there should be many stocks that did survive and would either
show the profit potential of shorting or the reduction of risk.
I seriously doubt that most traders go short expecting the stock to go to zero
and be delisted from the exchange.
If to be successful we must find the next Enron.
You are again proving my points.
Realize that when testing long positions there is no requirement that we
find stocks that have quintupled for valid results. We look for typical results.
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The mere fact that the future can be different does not void a trading idea
or its test. Using that "logic". All technical, fundamental, economic, wave theory,
sector rotation, and technical indicators, chart patterns, are void since the future
can be different.
If we have to question Bulkowski's competence. If we have to cherry pick the
times in the market when we will test shorting. If we have to wait for the
great depression for something to be effective. Then it is not something
that should be thrown off-hand into the traders tool box.
Thanks
diceman
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Registered User
Joined: 11/1/2005
Posts: 240
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Diceman,
Books are for selling, what the author knows is what they write about. I think you are inexperienced on this topic, your posts prove this. new board menbers should have topics explained by those who understand this process.
I don't like to get personal, it dosen't do the board any good. shorting is for the trader with some experience, to argue different is misleading. it simply means you don't understand.
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Registered User
Joined: 12/27/2004
Posts: 15
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Imagine, you are selling apples on a sunny day. Just when you close your little stand, a friend comes up to you and states " I need a 100 apples for the school tomorrow by 7 am!!!. Can you get them?"
"Sure" you reply and you tell your friend that " give me 100 X $2,25 per apple and I get them for you tomorrow".
What happened here is that you sold apples you did not own (yet) and your inventory is literally "100 apples short" ...
You go to your supplier at night, just to find out that secondary to a shortage in apples, your supplier is now requiring $3.00 per apple.
Since you already sold the apples to your friend for $ 2.25, you lost $ 0.75 cent per apple.
That is the principle of shorting. Selling something that you do not own and are force to buy to deliver in the future. This is quite different from being on "margin", where you borrow money and use your holdings as collateral. Margin is a loan, and you pay a (more or less) fixed interest rate on the loan.
Other points of interest are:
- When short, you are responsible for the interest and or dividends of the holdings you are short for. You short a stock with a dividend payment of $ 0.25 / share per Quarter, you will have to cough up that payment. so, I don't short just prior to ex-dividend ...
- stocks do have a tendency to fall faster than they clim, and hence, short positions do have a tendency to be shorter term
- stocks with a high percentage of shares outstanding already short, ALSO have an inherent "demand to buy" build in. Hence, caution when your stock starts to move against you. This would be the "short squeeze".
There are ways with options to hedge your position. If you own a e.g. 25 Call, and you shorted a stock at e.g. 24 which moves consequently to 28 ... you still have the right to buy at 25. This way your maximum loss per share would be $1 + cost of investing.
Newbies ... paper trade first. Get experience below your belt. It "ain't as easy" as it sounds. Longer term, stock do have the tendency to rise in price and that could very well include the one you shorted.
best wishes,
M
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Registered User
Joined: 11/1/2005
Posts: 240
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Take a look at "HUM" (1) middle of sept, (2) begining of oct, (3) end of oct. compare with a MACD and a TSV in the 2nd and 3rd windows, the divergence is clear. flip the charts and you have a good stock to buy long. 
some one posted this stock earlier?
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Registered User
Joined: 3/25/2005
Posts: 864
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The point I want to make to newbies about shorting is DON'T WORRY ABOUT IT! All of these so called pitfall are trivialities. Ok, 1)you don't want to be forced to pay a dividend -- then make sure you are out of the trade before that happens. 2)You think you should worry about excessive short interest putting the squeeze play on you -- then don't play the stock as an investment, trade it as quickly as you can and get out when you have made a modest profit and make sure you set your stops just as you would if you were going long i.e. don't get greedy (I believe someone earlier suggest 10% to 30% -- this is fair). Many times when I short a stock, I look to profit a $1.00 or more per share but I set my trailing stops after a .50c profit to protect a minimum of .50. So, sometimes that is all I will make on the stock -- NO PROBLEM! I STILL MADE MONEY! SO, ON TO THE NEXT CANDIDATE! 3) You think you can lose your shirt to infinity -- GIVE ME A BREAK! It's just theory! You will get out of the trade way before then. Like any stock that you play on the long side to make sure it doesn't drop too much, just monitor the stock and set your stops. NO DIFFERENCE. If I short a $10 stock the most profit I can make is $10 if the stock drops to $0.00. The most I can lose is gazillions, if the stock keep going up, right?
What is the probability of my losing gazillions? ZERO!
What is the probablility of my losing say only $3.00 if the stock go to $13? Do you think that I am still going to be in this trade? NOT ON YOUR LIFE! So, why do I need to worry about losing to INFINITY?
What is the probablility of my losing say only $3.00 if I buy a stock for $10 and it drops to $7? Do you think that I am still going to be in this trade? NOT ON YOUR LIFE! It is exactly the same concept as buying the stock!
You guys are really making this too hard! Just Do It! Like you would 'Just Do It' when you are buying a stock. Stop worrying about all of these trivialities. And, you don't need a book to read in order to start shorting!
Just Do It! Man!
Shorting these days is so easy, because you can do it online. If the broker does not have the shares available for you to short then, after you enter your order, a message will come back saying that 'this stock is not shortable' or 'the shares are unavailable for shorting'. Otherwise, the trade goes right through just like it does for long plays. Then you monitor it or set your stops or both to make sure it does not rise too much as you are waiting for it to drop. See? Just like buying a stock -- you monitor it and/or set your stops to make sure it does not drop too much as you are waiting for it to rise.
With shorting, you can easily take a position after the next uptick, just set a limit order to short the stock maybe .10 below the current bid and more than likely you will get filled if the shares are available to short.
In the old days, you had to call up your broker and he would put you on hold for 5 minutes in order to see if they had the share available in inventory for you to short -- very tedious and time consuming back then. Online shorting is so much faster! You get in, you wait for stock to drop .50, 1.00 or whatever you think you can make in a short period of time and you get out. That It!
Shorting is not hard! For your practical purposes, it just the opposite of going long. Stop worrying about all of the distinctions vs. going long. All of that stuff is negligible! Just Do It!
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Registered User
Joined: 1/28/2005
Posts: 6,049
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Quote:"Diceman,
Books are for selling, what the author knows is what they write about. I think you are inexperienced on this topic, your posts prove this. new board menbers should have topics explained by those who understand this process.
I don't like to get personal, it dosen't do the board any good. shorting is for the trader with some experience, to argue different is misleading. it simply means you don't understand. "
jimstacy
I don't think you understand my posts.
That exactly what I am arguing.
Thanks
diceman
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Registered User
Joined: 1/28/2005
Posts: 6,049
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newbies
Do me a favor.
If you investigate the world of shorting.
Remember it was others who said it was "easy as pie".
If trading were sooooo simple.
Who would be working??????
Thanks
diceman
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Registered User
Joined: 1/28/2005
Posts: 6,049
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Id like to explain something which shapes my thinking on
this type of topic. (new trader question)
In the mid-1980's I started trading index options. A friend of mine
was also interested in the markets. I explained to him what I was
doing and how I was doing it and what the results were.
He saw my results as "easy money". He immediately opened
an account.
He brought a bunch of call options that immediately went against
him. Panic set-in. He stared doing all types of spreads to cover
himself. By the time his "first" options trade was over he lost
about $10,000.(which was also his last trade)
The point is its not about your results. Its about the dangers in a new
traders hands. The same thing you can do all day long. Can be a disaster
in the hands of a new trader.
(I saw a trader who daytrades state something like: "stops are for idiots". That's
a fine attitude to have if you can watch your trade every minute but most
do not have that luxury. You shouldn't take your world and put it in the
hands of a beginner.)
Your allowed to answer posts however you please but I think its wise
to err on the side of caution.
The way I see it. If I'm wrong they will eventually work their way up to
it anyway. If I'm right I may have saved them some pain and bad
losses.
Thanks
diceman
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Registered User
Joined: 3/25/2005
Posts: 864
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There is a reason I adviced the newbies to set their stops -- because they are newbies.
Personally, as a day trader, I don't use them, as I have the time to monitor the stock (which on average is only up to the first 3 hours of the trading day). Then, I am done. Very, very rarely do I find myself watching the computer screen for an entire day. And, I can attribute that luxury to the stocks that I pick for trading. Much more often than not I can count on the stocks, that I pick, to generate enough fluctuation in the first few minutes to the first few hours of trading to give me a satisfactory outcome.
Now on occassion, I will hold a stock overnight in a swing trade and that is when I set a stop (which I do just before the closing bell). But, once the new trading day begins, I remove that stop and monitor it as I would a day trade.
Final Note: These days, it may be getting even safer to set stops when you use what is known as the hidden stop(as is offered by E*trade). Also, there are contigency stops available these days. Personally, I haven't used any of these tools as of yet. But, I may give them a try in the future.
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