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The Do's and Don'ts of Shorting the Market

Aug 1, 2008
The Do's and Don'ts of shorting is actually very straight forward, yet many traders heed this advice only to lose money. Shorting any tradable good is a dangerous position by nature; short sellers can lose more than their investment while potentially profiting only as much as 100%.

Both day traders and swing traders alike have much to gain from short-term short positions, which allow them to capitalize on the dropping value of a security. Often, it is a failing company or a bursting bubble which can yield large returns on the downside as it did on the upside.

Do's of shorting

Do use technical analysis as a way to study short positions. Shorting is a very sensitive investment because it requires that much emphasis be placed on the entry point. The active professional trader uses technical analysis as a way to study the future of a price while ignoring the traditional fundamentals.

Do use a comprehensive trading plan. Selling short requires more in depth studies than that of long positions. A comprehensive trading plan for shorting is usually in much greater detail and highlights virtually every outcome of a possible position.

Do chart out support and resistance for entry points in short positions. Support and resistance points are critical for shorters because they tell when the stock need be sold.

Don'ts of shorting

Do not expect instant financial freedom. Life-changing results rarely come to short sellers just because of the fact that short selling is not as potentially profitable as long positions. Selling short at $25 with a move to $0 is a 100% gain, while $1 to $3 is a 300% gain. Short sellers can only make up to double their money back and lose multiples more.

Do not hold short positions for long periods of time. In the short-term market for day traders and swing traders, short positions provide optimal return while limiting downside. Short positions are often best for short periods of time.

Do not try day trading with a small account. Short selling with a small account is almost impossible because brokerages will not front the kind of margin required to sell short a large number of shares. Bigger accounts are required to take short positions. The professional trader must have enough to ride out large market upswings against the shorted security.

General Information on shorting

Beating the market with short positions is difficult but not impossible. It is certainly the case that short term traders are better positioned for using short positions than that of long term traders because of the small profit possibilities of long term shorts.
About the Author
Leroy Rushing is an active, professional day trader; trading coach; and author. He is the Founder and CEO of Trading EveryDay, a provider of educational trading products and services that are available worldwide. Trading EveryDay has complimentary/FREE products, a Tools of the Trade eBook and a Trading Room Report , that are downloadable for your convenience.
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