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How to Sell Short Stocks

Making Money in the Stock Market During a Market Correction or Bear Market

For investing or trading, the focus is mostly on stock prices rising, but traders can also make money in the Stock Market by learning how to sell short stocks.

It is inevitable that, from time to time, the Stock Market must correct, meaning stocks MUST move down for a period of time, especially when stock prices have moved up very quickly in a short amount of time. If stocks did not correct to adjust out speculative gains, we would have Bear Markets much more often than we do. True Bear Markets are very rare. Market Corrections occur much more frequently, and they happen over and over for every stock as it continues in its overall Long Term Uptrend or Bull Market.

Therefore, every Independent Investor or Trader should understand not only how Bull Markets work, but also how Market Corrections and Bear Markets work. Market Corrections and Bear Markets are much shorter in duration than Uptrending Markets, so selling short requires a different set of Techniques and Rules to trade successfully.

Why Sell Short

Selling short provides income during Stock Market Corrections and Bear Markets for Independent Technical Traders.

It is also an excellent way to mitigate losses in personal Long Term Portfolios, Mutual Funds, and Pension Funds. Sometimes Independent Investors are unable to move their money out of stocks during a Market Correction, or they do not want to sell their stocks. By learning to sell short stocks using either Exchange Traded Funds or ETFs, Stock Option Puts, or other Stock Derivatives, Independent Investors are able to make profits from the downside activity to offset the losses in their long-term investments.

When to Sell Short Stocks

First of all, the market must be in an Intermediate- to Long-Term Downtrend. Trying to sell short when a stock is merely in a minor Retracement doesn’t work.  This is one reason why traders who lack a complete education in how to sell short stocks lose money when they try to go it alone and short stocks without understanding how the market Downtrends.

The downside of the market is very different from the upside. This is due to the fact that far fewer Market Participant Groups actually sell short. Most of the time, people sell stocks to close their bought stock positions, but do not sell short. They are selling the stock they own, either because they have made a good profit or they are losing money on the stock.

What to Sell Short

Stocks are as easily sold short as they are bought. With a click of a button in your online Broker Trading Platform, you borrow the stock from your Broker to sell short. When the stock falls to a lower price, you buy the stock back from the market to give back to your Broker.

In order to sell short stocks, you must have a Broker Account with Margin. Your Broker will loan you the stock out of their inventory, charging you interest during the time between when you sell short and when you “Buy to Cover” in order to return the stock to your Broker. Buy to Cover is the term used when you are closing the short position. You are buying the stock you sold short to “cover” your short position with your Broker.

Most shorted stocks are at least $20 or more in price. Lower priced stocks lack sufficient liquidity and point gains for good short selling profits.

If someone owns a stock, they cannot sell it short. If they attempt to sell short, they are merely selling the stock that they own. Therefore if you want to sell short a stock you own and want to continue holding it, you will need to learn to trade Option Puts instead.

You can also use Exchange Traded Funds ETFs as a means of selling short an Index or Mutual Fund that you own, thereby mitigating the losses of that fund during a Bear Market.

How to Sell Short Stocks

Trading Style

Swing Trading is the most common Trading Style used by Traders who sell short stocks. This is a fast paced style that many traders find a lot of fun. It is harder to make good short selling profits Day Trading which requires considerably more capital, experience, education, and expertise in reading stock charts.

Short selling stocks requires strong Technical Analysis skills because the only Traders selling short are Technical Traders. This is different than the Uptrend, where Fundamentalists dominate the price action.

Tactical Approach

Entries and Exits must be based on price patterns, so learning to identify the Sell Short Entry and Exit Signals with Western Candlestick Patterns is crucial in how to sell short stocks. Just using a Japanese style Reversal or Continuation Candlestick is not enough. Sell Short Entries and Exits must be precise candlestick patterns, which offer the lowest risk for the highest profit potential. Therefore in order to sell short stocks successfully, you need to learn the most reliable Western Candlestick Sell Short Entry and Exit Signals.

Solid Technique

Traders also need to learn how to use Technical Stop Losses rather than Percentage Stop Losses. Again this is due to the fact that most sell short Traders are Professionals, who use Technical Analysis to make trading decisions.

Indicators must be adapted and adjusted to the Downtrend. Stocks moving up require continuing Volume to rise, and if volume evaporates the run upward will stop. However that is not true of the downtrend action, where stocks can and do fall on lower Volume. This is another example of the many differences between Uptrend Indicators and Downtrend Indicators. Some indicators do not work for the Downtrend at all, for example MACD is one such indicator.

Stock Charts Examples of Sell Short Trades

Based on Technical Analysis and chart patterns, this stock can easily fall back down to the lows of the candle that High Frequency Traders gapped down.

In order to insure that the stock doesn’t move up in price after you enter the trade, we teach a special Bracketed Sell Short Order that keeps the order from triggering if the stock moves up instead of down.

This is one of many parts of the Trading Process needed in order sell short stocks successfully.

Selling Short Stock Trade Example

The initial sell short profit is targeted at the low of the High Frequency Trading gap down candle, which is a 25 point gain.

Stocks tend to fall faster than they move up so gains are often higher, but you must protect yourself at all times. This is done with the proper protective Entry Order, the Ideal Candlestick and Indicator Patterns for Entry and Exit, AND a Stop Loss placed at the correct technical level.

This is a pricey stock, so some traders would be using Option Puts instead of trading the stock.

Since you chose an excellent Sell Short Entry Signal with confirming Indicators, the stock did fall in price down to the pre-determined exit level. In fact it fell beyond that, as can happen in a Downtrending stock. Profits are the difference between what you short sold the stock for and the cost of buying the stock to cover, or about 25 points for this sell short trade.

 

Short Sell Stock Example

If you traded a much lower priced stock, the points that it would fall would be less.

 

Here is an example of a sell short entry on a lower priced stock with a few points gain.

 

The Sell Short Entry Signal occurs on rising Volume and other confirming Indicators.

Risk is low because the prior candles are small and tightly compacted.

Entry for the sell short trade is below 21.35 and the stock falls to 18.00 for a 3.35 profit on the Swing style sell short trade held for a few days.


To be successful Selling Short requires the following:

♦   A complete Trading Process.

♦   A complete education on all aspects of Stock Market Corrections and Bear Markets, including the Western Candlestick precise Entry and Exit Signals.

♦   Strong Spatial Pattern Recognition Skills™ based on Relational Analysis™ that goes beyond the basics of Technical Analysis.

♦   A Simulator Trading Platform to gain experience.

♦   A Broker Account with Margin.

♦   Tools for selling short, such as the proper Sell Short Indicators with the correct settings and periods for the Downtrend Market, Scans and Sorts to finds stocks quickly for Selling Short, and a Reward vs Risk Calculator to refine and streamline the analysis process.


 

Learn How to Sell Short Stocks

We are proud to introduce a NEW COURSE “The Definitive Guide to Market Corrections” which teaches how to sell short stocks in detail. All of the above and more is covered in this comprehensive course on navigating Downtrends profitably.

Short Selling Stocks - Definitive Guide to Market Corrections CourseSell Short Trading Course - TechniTrader

 

The Definitive Guide to Market Corrections

Contact us to enroll and lock in a limited time NEW COURSE offer!

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