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Tips for Short Selling Stocks

Tips for Short Selling Stocks
July 29, 2015 Martha Stokes CMT

Shorting Stocks during Market Corrections

Short Selling stocks during a Bear Market or Intermediate Term Correction should be part of a Trading Plan if you are a Swing, Momentum, or Day Trader. Often times when a technical trader is highly skilled, they can earn more on the downside action than upside action, particularly if the upside is in Platform Pattern™ or choppy sideways action.

TechniTrader down market design red keyboard button with blue aroundThere have been many changes to the technical patterns of the downside in recent years. Knowing what to study in technical patterns to improve profits is necessary for shorting stocks during market corrections.

Here are five tips for short selling stocks during a Bear Market or Intermediate Term Correction:

1. There are many new Topping Formations. The older text books on Technical Analysis feature 5 main tops. However due to the giant institutions moving their huge lot orders off the exchanges into Dark Pools and the numerous new order types available to them, Quiet Rotation™ which is the method of slowly lowering their quantity of held shares is now changing the structure of tops.

Chart example #1

 

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TechniTrader - A TC2000 Chart example shows a new Topping Formation

 

2. Part of learning Short Selling stocks is to know when stocks will reverse and move up. Bottoming Patterns during Market Corrections are also different than the primary bottoms that most traders have learned. This example is to show that it is important to recognize when a stock is poised to move up instead of down. The key factor again is identifying the most important Market Participant Group which are the giant institutions who have the ability to control price, this time during their Quiet Accumulation phase. Their order doesn’t trigger their incremental buying, unless the stock is within a certain price range called a Dark Pools Buy Zone™ because they use a bracketed order.

Chart example #2

TechniTrader - A TC2000 Chart example shows a Bottoming Pattern during Market Corrections

 

3. Tips for short selling stocks include recognizing that High Frequency Traders HFTs have also created new Topping Formations, and often create huge gaps that are much larger than in prior decades before HFTs. The automated millisecond orders of the HFTs, creates huge price runs that last normally for one day. Swing, Momentum, and Day Traders need to be in the stock prior to these big gaps and runs on very high volume, in order to enjoy the big gains.

Chart example #3

TechniTrader - A TC2000 Chart example shows a huge gap that High Frequency Traders HFTs have created

 

4. A sideways pattern called the Platform Formation™ develops, that often creates MACD crossover signals for buying or selling. Unfortunately the Platform Candlestick Pattern™ is too narrow for good Swing and Momentum Trading, and causes most of the whipsaw action that discourages retail traders who try to Swing Trade. By recognizing this new sideways price formation, traders can learn how to use it to their advantage rather than experiencing chronic whipsaw losses.

Chart example #4

Technitrader - A TC2000 Chart example shows a sideways pattern called the Platform Formation™

 

5. Candlestick Entries for selling short need to be more precise than mere continuation or reversal patterns. Tips for short selling stocks require specific size candles as entry signals, recognizing positioning of the candle pattern, and determining distance from support for the optimal very low risk sell short trade. Just using a typical candlestick pattern will not provide controlled risk with high profit potential.

Chart example #5

A technitrader Chart example shows 5. Candlestick Entries for selling short

Summary

The Market Structure has changed more in the past decade than the prior 100 years. New venues, new order types, and new Market Participant Groups create new technical patterns, candlestick entries and exits, alter support and resistance strength and weakness, as well as create new trendline patterns. Indicators need to be adjusted to fit the new downside action, and some popular indicators fail dismally in the downtrend for shorting stocks during market corrections.

Understanding all of the components of changes included in the tips for short selling stocks, will help technical traders succeed during a downtrend. Profits are not magic or luck. They are well planned, carefully analyzed, and use a precisely constructed trading process.

Trade Wisely,

Martha Stokes CMT

Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses

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Martha Stokes, CMT is co-founder and CEO of TechniTrader. She is a retired professional Buy-Side Analyst and was awarded the Chartered Market Technician designation for her thesis, "Cycle Evolution Theory." Martha is a passionate teacher of the financial markets and a prolific writer, having created over 40 stock, option, and financial market courses.