Short Selling StocksShort Selling Stocks can be a fantastic way to make money when stocks go down. If you are interested in selling stocks short this article will cover how to short a stock, as well as what it is and what the restrictions are. What is Short Selling Stocks? A simple stock short selling definition is; the process of borrowing a stock from your broker and selling it on the open market. You can then buy the stock back in the future (hopefully at a cheaper price) and return it to your broker. Basically instead of buying low and selling high, it is selling high first and buying it back at a lower price later on. Because the broker in many cases is holding onto their stock for the long term they don’t mind lending it to investors as long as they get it back at some point. How to Short a Stock One of the first things people want to know about shorting stocks is, “How to short a stock for a profit” and this is a little complicated because there is no one size fits all strategy. There are many different indicators which professional traders will use to determine if a stock is ripe for the short. Some of these indicators involve Oscillators, which are mathematical buy and sell signals for instance the marketclub trade triangles is a great oscillator, chart patterns, which are reoccurring patterns in the market, and candlestick patterns, which are reoccurring patterns that happen on a daily bases. Professional traders will combine a few different indicators together and combine that with their own risk to reward tolerance. I love chart patterns personally because they tell me exactly when to get in and what my potential risk and reward are for a given trade will be. Here is an example of what a chart pattern looks like, the stock is breaking below previous support at $30 and according to this pattern it has the potential to drop all the way to $15. Likewise I know if it breaks up above $30 it is time for me to get out of the position and to accept the loss before it gets too big.
But that is just one example of a simple strategy for short selling stocks. In the end you need to what your reason to short a stock will be and why it makes sense to you to use it. Pros and Cons of Selling Stocks Short When you short sale stocks there are certain risks, just like anything else. Most financial professionals will agree that the biggest risk is the unlimited loss potential. There is no limit to how high a stock can go up; therefore there is no limit to how much someone can lose by shorting a stock. While this is true to an extent the risk can be neglected by using things such as stop losses and money management techniques. The real advantage and disadvantage of short selling stocks is actually the same thing. STOCKS FALL FAST! For example in my trading stock options page I showed an example of how I made a 260% profit in 2 weeks playing the downside. But after those two weeks the stock quickly rebounded and could have ended up being a big loss for the inexperienced trader. That is why when shorting selling stocks it is important to have a short term plan that relies on technical indicators. It can also be a lot harder to “trade with the trend” on the downside because a lot of times once the trend has started it is already over with. This is why most professional traders will attempt to sell at resistance or use some other method to catch a stock before it makes a move to the downside. Speed is important here. Stocks tend to go up over the long run, so buying and holding will probably not work out very well. Questions to Ask Yourself Before Short Selling Stocks Before you even began to sell stocks short there are a couple questions that you should ask yourself. Don’t start thinking about “how to short a stock and make big bucks” until you can say yes to these questions. 1. Am I Eligible to Short Stocks? Is my trading account not for long only trades? 2. Do I have Any Experience with Short Term Trading? 3. Am I comfortable with Short Term Trading? 4. Do I have a Plan, a reason to short a stock? Naked Short selling As of 2009 Naked short selling is illegal. This is simply selling a stock without having something to back it up with (like a borrowed stock). Your broker should take care of this, so you don’t have to worry about breaking a law. What it does mean for you, is that you can only short stocks that your broker has available. So make sure if you are going to short a stock that your broker has some of it in reserve, otherwise your order will not get filled. Return From Short Selling Stocks to What Are Stocks Go From How To Short a Stock to Stock Trading Tips
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