Saturday, February 20, 2016

Don't Just Short It!

If you want to be a winning trader, never short because you think:
  1.  The stock is overvalued or
  2.  Because it went up too fast.
If you think a stock fits either 1 or 2, be patient, and wait until the market agrees with your point of view. Ideally, you would want to follow the stock and use technical analysis. When the the trend changes downward, then short it.

However, one could argue against this strategy (correctly), that the use of technical analysis isn't often accurate, especially the way it is taught in books. Just too many people using it, making it less reliable, and leaving you vulnerable to margin calls, or severe losses with put options.

Remember that stocks go up at a slow pace, but it takes a split second to plunge; that is why shorting is an art and timing is everything (unfortunately timing often is random as explained above).

Shorting during earnings is gambling; In the past years Amazon (AMZN) and Netflix (NFLX) are a good example of crazy upside actions. The market isn't rational; it does what it wants. Sometimes you get so caught up in the emotions of trading that you forget that no matter how right you think you are and no matter how over-valued you think the stock is, the market is boss. Remember that!

Epic examples of "easy" short trades in recently years that have ruined trading careers and forced early retirement are small caps such as KBIO (went up ~4000% in a matter of days), and LAKE (Ebola scare few years back) .

Often it is just best to avoid shorting all together, if you trade/invest in large cap stocks, you will make money as the Market in the long term always goes up (despite 2000/2008 Market crashes).

Check out my other article on Why Stock Options Are Bad!