What Are the Differences Between Sell Short & Buying Long?
List Explains and Includes Stock Volume, Energy, & Support
Stocks move upward in fairly typical patterns that occasionally alternate and shift for instance from Stairstep Candlestick Patterns to Peaks and Valleys. But the sell side of the market can often drop like a dead weight. An uptrend looks like a gentle slope upward until the peak, which is often more steep, but the downside frequently looks like a Sheer Cliff. Stocks will plummet far faster than they rise. This makes trading Sell Short in the Stock Market more profitable for a short amount of time, but also riskier because of the momentum behind the runs.
The Differences Between Sell Short and Buying Long in the Stock Market are the following:
1. Stock Volume
You will see more stocks dropping on lower stock volume and stocks dropping day after day in a momentum run down. If you look at charts, you will see that the upside is more gradual and that the downside is much steeper. This is one of the reasons downtrending markets last a short period of time, while uptrending markets last for long periods of time. Most traders are simply more comfortable with the long side and holding as a stock moves up; to them, trading Sell Short may seem confusing.
What makes markets surge or move upward is energy, enthusiasm, and buyers. What makes stocks drop is uncertainty, indifference, despair, and panic. Stocks run up because of energy; however, stocks can drop due to a lack of energy. A dull market is at risk of dropping from its own weight of indifference. Stocks don’t always need bad news to drop. They can drop because of a lack of interest.
Weak support will collapse without much effort. Moderate support will buckle if the stock has poor fundamentals or because it is in a weaker sector. Strong support will hold for the most part when the market is not in a Great Bear Market. A Stock Market Correction adjusts to overextended patterns in sectors, which have been overheated and running too long on the overbought side.
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It usually takes a novice trader about twice as long to learn how to Sell Short in the Stock Market than it does to learn how to Buy Long. For long-term investors who have been taught that to Sell Short is “bad” for the market, the length of time can be even longer.
Trading Sell Short is not bad for the market. It is actually a good thing. If you were to look at a stock chart of the Dow 30 Industrial Average since it began over 100 years ago, you would see that during all that time the trend has been up. Intermittently, there have been brief periods where the market was downtrending, but it always returns to moving up.
The periods where it moves down are Market Correction phases that are necessary to sustain the long-term uptrend. These corrections adjust the Angle of Ascent™ of the market uptrend, keeping it stable and sustainable.
Without corrections, the market could not sustain this very long upward move. Trading Sell Short has been around since the earliest days of the Stock Market. It is not something new but something that is an integral part of the Stock Market, and it provides a means of making money during the normal and necessary Market Corrections.
A Market Correction happens when price action becomes speculative and no longer represents the true value of the stock in relation to its company’s growth potential. As the price falls, the value of the company and the value of the stock come back into sync or harmony.
Many traders enjoy the fast-paced atmosphere of trading Sell Short in the Stock Market, but some of the basic rules of trading are different for the sell side. One thing that has changed is that there is no longer an Uptick Rule. This rule had been enacted after the Stock Market Collapse of 1929 as a means of controlling trading Sell Short to keep it from causing Market Collapses. But in recent years with the advent of computer programs that initiate curbs which halt trading on a stock that is too speculative, the Securities and Exchange Commission (SEC) deemed that the Uptick Rule was no longer necessary. Then, after two years of testing, the Uptick Rule was eliminated.
The downtrending market price action is much different than uptrending, starting with the Candlestick Patterns that form. Stocks will plummet when trading Sell Short in the Stock Market with profits in a shorter amount of time than Buying Long due to stock volume, energy, and support.
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Martha Stokes CMT
Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses
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