# Short Selling Trading Strategies



## bassmann (11 September 2008)

Hi there,

I have been working on various short trading strategies over the last few months given the environment but to this point have not entered a short position because I am yet to come up with a strategy that is statistically reliable. My aim with this post is to identify knowledge gaps/insight into what I have explored so far with the aim of developing a system generated strategy for shorting the market.

To date I have 2 system I trade;
1.	A Long Bull Breakout system which has predominantly been switched off since Aug-07 (apart from some short mini bulls)
2.	A long Bear system that has worked ok in the current bear market based on oversold and resistance points as targets. 

Both systems make money, but the second to a lesser extent as expected. Can’t seem to develop a system that reliably makes money shorting though (should have kept my systems 2 years ago that tested me bankrupt and just reversed to strategy).


*Objective*
Primarily I wish to be net long, but see a great benefit in hedging my long Bear strategy with a short bear strategy, thus the fundamental of my strategy is to go short when the market is bearish.


*The Universe*
Benchmarked against XJO and tested against ASX200 Stocks.
Why ASX200 - specs have tanked deeper but are generally more volatile in an intraday capacity. Also Higher cap stocks are more accessible to short either on the ASX or CFD’s.


What I have tested in system development of a Short Bear system

*The Setup*
1.	Trend of XJO – have developed oscillators  that detect a bearish trend reliably
2.	Trend of underlying security – Security Close must be < 200 day SMA and the trend oscillator is negative. ADX(14) must be > 20 otherwise stock is trading
3.	Volume relationship of underlying Security – look for up days of high volume that lead into low volume days at a similar price level (i.e. Identify the bear rally)
The Signals
4.	Entry Signal – Entry price must be some derivative of the setup signal (i.e. >=C on signal or >= HHV of last X days (kind of a negative retracement).
5.	Exit Signal – mainly based on crosses above support levels for profit exits and crosses above resistance levels for trailing stops


*Questions

General*
•	Benchmarked annualised returns, what should I expect from a short system?
•	Win/Loss Ratio targets. What should I expect?
•	What would you suggest I look at next in terms of what I am testing?
•	What are the obvious gaps in the strategy I am testing?
•	Anything else you think is of use. 

*Specific*
•	High Intraday volatility – how to tackle stops and profit targets
•	Volume – how to interpret and its relevance on the ASX
•	Index Trend – anything to add to what I have above.
•	Trading environment Filter – ideas to identify such (currently using ADX(14)>20)
•	Trend going against the short position (with potentially unlimited losses). How to determine whether a bear rally is a rally or a trend reversal.
•	Logical stop that does not get hit too often by intraday movements

Thanks in advance,

Bassmann


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## kam75 (22 September 2008)

Sounds very complicated but.. it may be just the thing - provided you can follow it during losing streaks. Selling short is just the opposite of going long.  If you've traded long and made money, just reverse everything when shorting.

For example, I like to trade resistance breakouts long.  When selling short, I do just the opposite and look for a liquid, volatile stock that has formed a good top after a large, quick advance and is attempting to break support. The on-balance volume must be falling, showing the sellers in control. It’s then a matter of identifying a point of entry that allows me to sell short at stop on the break of support while simultaneously placing a tight protective buy stop order to automatically cover my position in case the dog does not dump as planned. As the trade unfolds, I trail the buy stop to breakeven and below to lock in profits while staying with the downtrend.

Your questions can only be answered over time by trading the system using real money. I would'nt get excited by results derived from historic data tests.

regards


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## tech/a (22 September 2008)

Shorts (When you can trade them) are short and sweet.
Using a 200 day m/a as a fliter means you'll lose most of the profit potential.

Ditch oscillators and use price.

Using crosses as signals is plain hopeless.

A shorting system has vastly different characteristics and should have vastly different conditions than a long system.Simply reversing a long method doesnt work in my experience.

Questions

General
• Benchmarked annualised returns, what should I expect from a short system?

*In a bull market a loss in a bear market a profit.*

• Win/Loss Ratio targets. What should I expect?

*This should be a shorter timeframe method so Id be expecting a greater than 60% win rate and an R/R of 2 or more.*

• What would you suggest I look at next in terms of what I am testing?

*Indexes.*

• What are the obvious gaps in the strategy I am testing?

*See above.*

• Anything else you think is of use.

*Heaps but you need to spend more time on the issues mentioned.You need to know what you need to do to make a method profitable.(see above)
*
Specific
• High Intraday volatility – how to tackle stops and profit targets

*Widen stops.*

• Volume – how to interpret and its relevance on the ASX

*Do you mean volume or market depth volume?*

• Index Trend – anything to add to what I have above.

Good move.

• Trading environment Filter – ideas to identify such (currently using ADX(14)>20)

*Higher highs and lower lows (weekly) Cant code though.*

• Trend going against the short position (with potentially unlimited losses). How to determine whether a bear rally is a rally or a trend reversal.

*Not required for a system.*

• Logical stop that does not get hit too often by intraday movements

*Work perhaps on 1.5 X---- 3 day volitility.*


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## Chorlton (2 October 2008)

tech/a said:


> A shorting system has vastly different characteristics and should have vastly different conditions than a long system.Simply reversing a long method doesnt work in my experience.




Based on my own experiences, I would also agree with this.  Trying to find a consistant profitable system trading on the short side is definately a lot harder than conventional long side trading.

Even if one can find reliable entry conditions, an additional problem is in trying to achieve similar results with regard to MaxDD and smoothness of Equity Curve that can be achieved when trading long.

This is not to say that its an impossible task, just one that is currently unachievable for me !!!


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## bassmann (3 October 2008)

Thanks for all your comments.

All makes sense and pretty sure I can code this. Now I'm off to build, design and test. Will post again when I have made some progress.

Cheers

Bassmann


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## tradezy (7 October 2014)

Hi,

I am trying to develop a quantitative Short Trading System  in Amibroker.  I have looked at variable time frames and market conditions. I am struggling to get anything to work in any market (bull, bear, sideways).

Reversing the my Long trading systems to Short systems does not work for me. I've tried tight/ loose stops, short term / long term periods, index filters..... I end up with negative/ low returns & big draw downs.

Has anyone had any success with getting a quantitative Short trading system to work?  If so, what is a reliable entry signal? Is the stop tight? Do you use an index filter? Any suggestions?:1zhelp:

Or is discretionary trading the way to go for short trading?

With thanks

Tradezy


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