Today’s question is: I want to start shorting but I’m scared. Can you help me?
I love shorting stocks so much that even in a bull market, you’ll find me shorting stocks. I’m really good at shorting stocks. I think that one of my strengths as a trader is finding those perfect stocks to short. I don’t have the patience to stay in a long position. In a short position, I know that stocks fall quicker than they rise so I usually make money quicker when I’m shorting.
That is my strength but that is also my weakness because sometimes when the market is bullish, I don’t really take full advantage of the bullish moves because I’m always looking for stocks to short.
Shorting stocks is so fun. Don’t be scared.
A lot of investors, especially beginner investors, come into the market with a pre-conceived notion that you can’t short stocks; that it’s not very American to short stocks; that it’s not very patriotic to short stocks. But seriously, this is Wall Street. It’s not about being patriotic or being lovely-dovey with the stocks. It’s all business. If the stock is weak, short it. Remember that you’re in the market to make money. You’re not in the market to fall inlove with the company.
For example, I love Apple products. However, when Apple stock is falling, I’ll short Apple. I don’t care because I need to make money as a trader. So whatever is falling, I’ll short it.
Shorting stocks is no different to going long. So long as you have your probabilities right, you’ll make money. As you know, you can have a 60%, 70% and 80% probability of making money in your trade.
A 3-Step Formula To Short Stocks
1. Only short stocks trading below the 200-day period moving average
This is what I teach my private coaching students. It is drilled into their brains. Every time I have a coaching call with them, I ask them if they’re allowed to short a particular stock. They will tell me that they’re not allowed to short stocks that are above the 200-day period moving average.
Here’s the thing, if the stock is trading above the 200-day period moving average, it has a 60% probability of going higher and only 40% probability of going lower. Given this, the odds are against you. On the other hand, if the stock is below the 200-day period moving average, you have a 60% probability that the stock is going to go lower. So, trade with the trend—short a stock that’s trading below the 200-day period moving average. You have the odds in your favor just by starting out that way.
2. Always short at an area of resistance
3. Take profits at an area of support
In this video, I’ll show you a chart of ESV to give you an example of a short. ESV is trading below the 200-day period moving average. The 200-day period moving average is at $56.90. The stock is now trading at $55.62. If you want to take this trade, you would want to take it at the 200-day period moving average because that will be your area of resistance. Then, look to the left to find the area of support to take your profit.
Always enter the trade at an area of resistance and take your profit away from the area of resistance, which would be you area of support.
The 200-day period moving average is a major moving average. Sometimes, stocks can bounce off the 200-day period MA. It’s not the best place to take your trades if you’re shorting but you have to make sure that you take it UNDER the 200-day MA.
A stock in a bullish market can reverse soon. You also need to learn how to identify momentum and reversal periods so you don’t miss a move.