Short selling is not used by many traders; they prefer to go long with stocks, maybe because they know that they have the long term market trend with them.
Some years ago, I tried to find a good trading system using short selling.
I had a long one and then in addition with a short one, I was thinking that it will be great.
When the market will goes up, my long portfolio will outperform the short one and when market goes down my short portfolio will outperform. No need to use any hedging strategy or to cover position using timing market techniques (which I think very few of them work and even they don't work very well). I then begin looking at the Internet for some tutorials, indicators about short selling. I read some books covering this subject and did a lot of back-test on some trading strategy that I have created by my own.
The conclusion about this hard work was that:
- Fundamental analysis doesn't work well with short selling.
Pick a very bad stock that have poor cash flow, poor ratios... is not a great idea.
- Technical analysis work much better when you want to go short with stocks.
Some patterns like double top or triple top give great indication of short pressure and are many time followed by a sharp drop.
- When the market or a sector is in an uptrend, never short sell a stock, never.
- Being short is much more difficult than being long.
Even if you found a good trading strategy than showed good results over previous years, you should consider others things:
- Not all stocks can be shorted, you must ensure than the stock is shortable.
- Uptick rule will let you miss some big down moves. You need to wait for an uptick to short the stock.
- Shorting gains is limited while being long can make you unlimited profit.
Last information about short selling: you don't have to pay margin interest when shorting.
Azouz, a full time trader author of this article.
Day trading system
Trading system Blog
