Short techniques vs long techniques

[cuttlefish]

I'd be curious to hear about some of the differences people apply in their approach when taking short positions vs taking long positions.

The old adage of 'up by the stairs and down by the elevator' means that timing is quite important for short strategies - but at the same time the potential profit from picking a correct move can be quite significant. I'm not sure how it works with CFD's having not traded them but with the other derivatives and with naked shorting it is not easy to get liquidity for a 'long term' short position - i.e. most people are trading within a couple of months out maximum and thus that is where the liquidity is. Also the cost of taking a position that goes sideways is fairly expensive vs sitting on a long term long position.

So the purpose of the thread is for people to discuss how they adjust their strategies/techniques for short trades to cope with these and any other perceived differences?

(and thus I'd love it if this didn't turn into a debate about whether short selling is a bad or good thing, or a technical vs fundamental argument ).

 

[Aussiest]

Well, i've never done a successful short, but i'm thinking i'm going to wait till i think a share is oversold (look at volume), wait till it's near a record high, or around resistance line near record high, and think carefully before getting in before ex dividend date.

I'm also going to expect that the price may go up a little and make sure i have enough funds in my account to cover this. I *think* (although not sure, just a theory) this is one of the fundamentals of short selling.

 

[Aussiest]

I'd be interested in hearing other people's views in relation to shorting a few weeks before an ex dividend date .

 

[ice]

I have 2 golden rules for shorting.

1. Never short an all time high.

2. Never break rule 1.

Otherwise I don't treat shorting any different from 'longing'.

In the end it's all about money management anyway.


ice

 

[cuttlefish]

Regardless of what technique you use the dividend amount will be factored into the price so you need the stock to fall by more than the dividend premium - so really there's no benefit in deliberately targeting ex-dividend dates.

 

[slackjaw]

...the cost of taking a position that goes sideways is fairly expensive vs sitting on a long term long position.

With cfd's you earn interest on short position, so you get paid to sit on a short position that goes sideways. The interest earned is 2% below the RBA cash rate. With an amount of 500,000 thats enough to pay the mortgage, plus the prospect of covering at a lower price.

Really though, this would be used to offset the interest paid on leveraged long positions

 

[Aussiest]

I have 2 golden rules for shorting.
1. Never short an all time high.

Really? How come?

 

[skc]

Really? How come?

Shorting at all time high can be thought of as the reverse of "catching a falling knife" and buying at all time low. You will be trading against momentum...the risk is that you will lose a finger or two!

I think shorting is done over shorter durations because:

- Market falls are typically short and sharp
- You wouldn't hold short positions forever, as the potential loss is unlimited (as opposed to long trade which the absolute loss is the value of the position)

 

[ice]

Bitter experience Assiest.

It's simple probability really.
There is only 1 finite all time high but usually many temporal all time highs along the way. So the odds are that an all time high, isn't, and since trading is all about the odds I would always prefer to buy an all time high rather than sell one.
But that's just me.

ice

 

[Aussiest]

Shorting at all time high can be thought of as the reverse of "catching a falling knife" and buying at all time low. You will be trading against momentum...the risk is that you will lose a finger or two!

I think shorting is done over shorter durations because:

- Market falls are typically short and sharp
- You wouldn't hold short positions forever, as the potential loss is unlimited (as opposed to long trade which the absolute loss is the value of the position)

Ouch.

So, you'd watch carefully around record high and wait till you thought it was over-sold?

Regardless of what technique you use the dividend amount will be factored into the price so you need the stock to fall by more than the dividend premium - so really there's no benefit in deliberately targeting ex-dividend dates.

No, i wouldn't be targeting ex dividend dates, i would be avoiding them due to the fact that you have to pay dividends on shorted stocks (if held during that period).

Imagine if you took up a short position at $38.00. Share rises to $39.50 (still within your stop-loss), then dividend hits. Share drops to $38.50.

You are still $.50 (50 cents) in the red, plus you've paid the dividend.

If all else looked good to enter trade a few weeks before ex dividend date, and the price was right, you would have to think twice before entering trade so you didn't get stuck with dividend cost.

Am i on the right track?

 

[Aussiest]

Bitter experience Assiest.

It's simple probability really.
There is only 1 finite all time high but usually many temporal all time highs along the way. So the odds are that an all time high, isn't, and since trading is all about the odds I would always prefer to buy an all time high rather than sell one.
But that's just me.

ice

It would be interesting to see / measure how long after a record high, sentiment seemed to dwindle. I think that once sentiment dwindles, could be good for a short (perhaps), especially if volume had increased dramatically...

Just looking at WPL's chart, price reached record high, dipped a bit, then tested it again. Perhaps good strategy would be to wait until record high had been tested, but failed... . Food for thought, not recommendation .

 

[Boggo]

I have 2 golden rules for shorting.

1. Never short an all time high.

2. Never break rule 1.

Otherwise I don't treat shorting any different from 'longing'.

In the end it's all about money management anyway.


ice

Not sure if I agree with you on that ice, higher they stand the harder they fall.
Just my

 

[Aussiest]

Not sure if I agree with you on that ice, higher they stand the harder they fall.
Just my

That's a very interesting chart Boggo, and thorough. But, what happens if the price does not get to your 'decision point'?

 

[ice]

Hi Boggo, I guess we are each shaped by our experiences.

I am sure there are times when TA can get you into a short high on the hog as it were, but I lack the requisite skills and am too lazy to try and acquire them. Instead I exist by a grab-bag of basic rules and simple signals.
My trading philosophy is best summed up by a US trader who once said "I am so lazy I married a pregnant woman".

That's my sort of trading.


ice

 

[Boggo]

That's a very interesting chart Boggo, and thorough. But, what happens if the price does not get to your 'decision point'?

First aim is to get the stop to the breakeven position.

From there on, for me anyway it varies a bit in each case depending on what is happening with the stock, ie if it is an ABC correction then be ready to reverse your position to long etc.

ATR is one method that works well after breakeven locked in.

My again

 

[Boggo]

My trading philosophy is best summed up by a US trader who once said "I am so lazy I married a pregnant woman".

ice

LOL

 

[Aussiest]

First aim is to get the stop to the breakeven position.

From there on, for me anyway it varies a bit in each case depending on what is happening with the stock, ie if it is an ABC correction then be ready to reverse your position to long etc.

ATR is one method that works well after breakeven locked in.

My again

Hi Boggo,

Thanks for your response .

When you say "break even", do you mean in terms of:

Initial share price + brokerage (x2) + interest (if long)?

So, you would change your stop loss method after breaking even?! That's interesting.

And another question for anybody kind enough to answer (!):

Do you determine your stop loss level first and then calculate your buy-in price?

 

[Boggo]

Hi Boggo,

Thanks for your response .

When you say "break even", do you mean in terms of:

Initial share price + brokerage (x2) + interest (if long)?

So, you would change your stop loss method after breaking even?! That's interesting.

Breakeven, exactly as you say.
Profit stops, can vary to suit the individual stock/pattern/behaviour etc especially near projected target areas, but that is just my way.

Another

 

[Boggo]

Do you determine your stop loss level first and then calculate your buy-in price?

On CFD's I use $400 as max loss allowed (not taking brokerage and slippage into account).

Then the entry point, exit point and target will determine the buy volume and risk/reward.
I don't take anything that has R/R less than 2.

MTPredictor auto calculates the figures whereas currently long on BLD using Metastock and I do exactly the same in 2 secs on the calculator.

Or go here and download the free position sizing calculator http://www.stator-afm.com/downloads.html

Basically, ($400/(exit-entry)) = number to buy.
eg FMG (400/(12.71-11.89)) = (400/0.82) = 487 shares to short.

Same principle but different figures on two other accounts using direct shares.

Another

 

[Aussiest]

Thanks for the 2 cents Boggo!

Now it's a matter of me determining how i will find my entry . Oh, the work ahead...