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3 Powerful Trading Strategies to Master Short Selling

by Daniel Pauly

Short selling is a skill that takes advantage of market fluctuations from higher to lower prices. Learning how to benefit from short selling is tricky, and it often intimidates traders or investors because of the steep learning curve. Many avoid it altogether, even in a bear market. Yet this method can be profitable during uptrends and downtrends as long as the correct rules are followed, and timing is carefully researched.

Here are three powerful strategies to implement.

Short Sale Mastery 101:

It’s easier to profit from short sales in downtrends because the “trend is your friend.” Despite the advantage, short sellers get needled relentlessly in bear markets, and it’s easy to get trapped in volatile squeezes that destroy the most carefully placed stop-losses. This truth tells us that long term profitability requires more just than throwing money at a falling security.

Short sale mastery needs denuded entry strategies, precise timing, and defensive trade management. Sellers must adopt rules that expand these strategies while lowering the risk of getting trapped in a short squeeze. Of course, these aren’t fail-proof because it’s normal for sellers to absorb shock losses from time to time, but the key is to minimize these risks while finding aggressive ways to ride prices to lower levels.

Profitability Techniques:

Traders can sell short at any time in a liquid market that has no special restraints. The current version of the US uptick rule doesn’t engage until a security has already fallen 10%, so it’s rarely a factor in deciding to sell short. Profitable short sales tend to follow one of three techniques, and as veteran trader and founder of Certus Trading, Matt Choi, suggests you should research these rules in greater depth:

  1. Selling a pullback in a downtrend.
  2. Entering within a trading range and waiting for a breakdown.
  3. Selling into an active decline.

Many traders decide to sell short at new highs, assuming a security has risen too far, but this is a formula for disaster. Uptrends can persist longer than predicted by technical or fundamental analysis.

Short Rallies, Not Sell Offs:

The first strategy as a short seller is to avoid following the cattle. Don’t use their emotional energy to get situated at the best possible price. Countertrend bounces give ideal conditions for selling short because you know the price where sellers might reload positions. The turbidity arrives if that crowd is larger than the crowd buying the broken security as they seek a new uptrend. Stock trader and teacher Robert Prechter says to keep your eyes on the calendar and avoid bullish seasonality. Short selling during holidays or during options expiration week can wreak havoc because those markets don’t follow natural supply or demand. Also, keep your emotions in check. It’s a liability to let your emotions take over during trades.