|
PureBytes Links
Trading Reference Links
|
Hi Heidi,
I can understand why this hasn't worked for you. I doubt that whoever came
up with this is a short pro. Just a quick glance at the criteria would lead
me to think of 2 scenarios that are classic short traps. Closing below the
50 day MA says either that the stock had already been declining for some
time or it was a news-related gap down.
If the decline has been over time, then the large drop on heavy volume could
be capitulation selling. Having only a few buyers stepping in will easily
put up the price. The 50 day MA is a favorite indicator of many systems and
its breach is watched carefully by market participants. Trading below the
200 day MA is probably more significant of a stock being a short candidate
in a bull market.
If it was a gap down on news, then remember that stock news is interpreted
differently depending on one's investment time horizon. There are always
those who will see the gap down as a chance to get in at a bargain or lower
their average cost. Long term "investors" can step in and the stock almost
always bounces back within a few days. While it may just be a dead-cat
bounce, you never know. Regardless, the bounce is almost always just high
enough to take out the most generous of stops. Worse for the trader's
confidence, once you've been stopped out, the price almost immediately
declines to a more favorable level. The least "tuition" you can expect to
pay for this lesson is about 3-5 points but I've seen a stubborn few wipe
out their whole account on 1 bad short trade as buying on dips has become
the investing mantra of the 90's.
Shorting stock well is a tough nut to crack. The odds are way against the
individual investor. The uptick rule in itself puts you at an even bigger
disadvantage to market makers going in. Lending stocks to short sellers is
one of the biggest profit centers for Wall Street. Like most things, what's
good for your broker is not good for your account.
It's ironic though that many amateur traders will experience great initial
success going short. But, this first success only blinds them to the
underlying risk they incur and sets them up for the account devastating loss
that is sure to come.
Success in trading is all about risk control. People who are good short
sellers of individual stocks tend to base the trade on rigorous fundamental
analysis, not TA. Unfortunately for them, they are notoriously bad market
timers. On the otherhand, good market timers and smart traders will use PUT
options. The risk is controlled while leverage is maximized. If you are
wrong then at least you've bought some downside insurance letting you trade
the underlying stock long more aggressively.
If you don't want to or can't use options, then at least confine your short
selling to NYSE or AMEX issues. The NASDAQ is too treacherous and almost
require getting Level II quotes. I also would not hold short positions
overnight. New news or a positive spin on old news may lead to a gap up the
next day. In fact, the smaller time frame you can do the trade in, the
better.
Personally, I prefer shorting S&P SPRDs aka "spiders." They are a proxy for
the S&P 500 and can be shorted on a downtick. Easier to trade with a
mechanical system too.
Hope this helps,
Rick
Tokyo, Japan
-----Original Message-----
From: Heidi Stubner <stubner@xxxxxxxxxxxxx>
To: metastock@xxxxxxxxxxxxx <metastock@xxxxxxxxxxxxx>
Date: Friday, June 05, 1998 5:14 AM
Subject: Shorting Stocks
>I'm testing a few theories on using indicators on shorting stocks.
>
>Thestreet.com provided the following criteria for shorting:
>
>1) A major downside break of at least 1 point or more.
>2) Increase in volume (more than 100% rise versus average daily volume)
>3) Stock closes below its 50-day moving average.
>
>I'd appreciate your comments on this, as I've tried using this theory and
>don't particularly find it of much value.
>
>Thanks.
>
|