Do you go short?

[123enen]

I wonder if people that "go short" could comment on this technique.

Has going short met your expectations, or have you been overwhelmed and caught out by it? Maybe you were lumbered with a dividend payment you had to recoup to the owner, or maybe you had to pay some form of fail fee?

Was it too easy to lose control?

I am also very interested in the following

Which brokers do you use for your shorting? Do they do everything you need?
Do you find it easy / difficult / quick / slow?

What is your preferred shorting mechanism?
CFD / Option / Borrowed ASX shares / Other

Would you be willing to try one of the above mechanisms that you have not already tried?

How long do you stay in short position – what is your longest time?

I think there are many people here like me that may be waiting to put their foot in the short water. Your answers and experiences may make it easier for us

Thanks

 

[wayneL]

I wonder if people that "go short" could comment on this technique.

Has going short met your expectations, or have you been overwhelmed and caught out by it? Maybe you were lumbered with a dividend payment you had to recoup to the owner, or maybe you had to pay some form of fail fee?

Was it too easy to lose control?

I am also very interested in the following

Which brokers do you use for your shorting? Do they do everything you need?
Do you find it easy / difficult / quick / slow?

What is your preferred shorting mechanism?
CFD / Option / Borrowed ASX shares / Other

Would you be willing to try one of the above mechanisms that you have not already tried?

How long do you stay in short position – what is your longest time?

I think there are many people here like me that may be waiting to put their foot in the short water. Your answers and experiences may make it easier for us

Thanks

Hi 123 enen,

I make extensive use of short strategies. In 2005 about 2/3rds of my profit came from shorts. But that was in the US market, it would have been a different story here in Oz.

Here are my thoughts:

In Aus the only viable ways to short are by CFD's (with all due cautions with regard to providers) or options (good if you like complexity)

The overriding consideration for shorting is the trading time frame. IMO you need to be using a short term swing methodology and stay away from trend following techniques.

Why? Trend following to the long side works well because of the fat tails phenomenom in the distribution of returns in stock markets. It is the outliers that make all the money. The distribution curve is leptokurtic http://www.riskglossary.com/link/kurtosis.htm

However this leptokurtic distribution is only true on the long side. It does not exist for shorts because zero gets in the way. The distribution is lognormal http://www.riskglossary.com/link/lognormal_distribution.htm

Another factor is the general market conditions. If the market is very bullish, like it is now on the ASX, any stock of reasonable quality is going to get bought up on the dips. Even some real flea bitten dogs get bought on dips, very hard to make money on shorts in these conditions unless there is some real negative sentiment on a particular stock.

Also don't short anything with even the remotest possibility of a takeover in the wind...very damaging.

Shorting is a great tactic but more for very active/professional traders. But there is not much in it for end of dayers.

My thoughts

Cheers

 

[Smurf1976]

Have traded short in the past using CFD's without a great deal of success. This was end of day trading not intraday. I think there is more opportunity for shorting for the highly active traders since it's absolutely not a "hold" strategy.

Be VERY careful with CFD's providers. The one I used was overseas-based and suffice to say that my strategy was profitable on paper but blew up spectacularly on their "market". When the market shoots up 400 points and then back down again in the space of a minute (literally) or does the reverse and drops 500 points then that causes a few problems with stops being taken out. I can see why the tax office in their home country considers it gambling and doesn't bother taxing profits.

I do intend having another go with a different CFD provider but that won't be for a while (2008?) since am far too busy with other things (like forex) at the moment to pay enough attention to it. Also would like to recover my lost funds from the previous attempt first...

 

[It's Snake Pliskin]

Have traded short in the past using CFD's without a great deal of success. This was end of day trading not intraday. I think there is more opportunity for shorting for the highly active traders since it's absolutely not a "hold" strategy.

Be VERY careful with CFD's providers. The one I used was overseas-based and suffice to say that my strategy was profitable on paper but blew up spectacularly on their "market". When the market shoots up 400 points and then back down again in the space of a minute (literally) or does the reverse and drops 500 points then that causes a few problems with stops being taken out. I can see why the tax office in their home country considers it gambling and doesn't bother taxing profits.

I do intend having another go with a different CFD provider but that won't be for a while (2008?) since am far too busy with other things (like forex) at the moment to pay enough attention to it. Also would like to recover my lost funds from the previous attempt first...

Going short requires a good understanding of what it is all about. It`s tempting to go short and take advantage of a stock`s problem but what are the risks? There are many:

some are liquidity, volatility, and short interest by other traders. Basically don`t trade specs that rise as quickly as they fall.

I don`t short yet, but certainly plan to do so.

Macquarie has a guaranteed stop loss system and direct pricing, not to mention the safety of holding your funds with an Australian bank.

 

[happytrader]

Hi 123enen

Personally I think before and after season sales on bluechips are great for buying and selling shorts. Its also helpful to know what percentage discount might be expected. With any stock it is useful to know what it is likely to do over afew years and particularly seasons e.g. pre results, post results, pre dividend, post dividend, pre Christmas and post Christmas sales.The 'lazy' trader would look at the charts with intention and have all the dates for comparison. Like anything else there is always a sale time. The only other thing you need to know is, do you like to be in at the beginning of the sale buying shorts, or selling shorts when stocks are at bargain basement prices?

Cheers
Happytrader

 

[bunyip]

If you have a robust technical system that works well for you trading long in bullish stocks, then there's no reason why the mirror image of that system can't be used to trade short in bearish stocks.

Example.....
One of the simplest and most effective systems for trading long is to find a strongly uptrending stock, wait for it to pull back temporarily, then buy it as the pullback finishes and the uptrend resumes.

For short traders, the mirror image of the above would be to find a strongly downtrending stock, wait for it to rally briefly, then sell it short when the rally ends and the downtrend resumes.

Once in the trade, you can stick with it as long as the downtrend continues. Or you can adopt a shorter term swing trading strategy of exiting the trade at the first sign that the next temporary rally is beginning.
In other words, you trade the swings.
Either way, trail you stop to lock in profits are they accumulate.

When trading the short side you need to be aware of the potential for massive losses.
You trade long, the company goes broke, the most you can lose is 100% of your investment.
With short trading you can lose much more than 100%.....your losses are potentially unlimited.
However, the simple solution to this problem is to use stop losses. That way, you choose the maximum amount you're prepared to lose BEFORE you enter the trade.
For a stop loss to work effectively, there has to be plenty of willing buyers when you want to sell, and plenty of sellers when you want to buy.
One of the absolute essentials of trading short is that the stock MUST have plenty of liquidity, otherwise you can really get hammered when there's not enough traders to do business with you at your stop price.

I don't consider dividends to be much of a problem with short selling. If the stock in which you're holding a short position pays a dividend, the amount of the dividend is debited to your account. But the stock is at the same time likely to drop by the approximate value of the dividend, meaning that its moved further in your favour.

The obvious trading instrument for shorts is CFD's. CFD's allow you to go short as easily as long - no need to make special arrangements with your broker. Guaranteed stop losses are available with some brokers - they guarantee that you'll get your exact stop price, even if the price action jumps over your stop as a result of an overnight gap or whatever.
CFD brokers pay you interest on short positions, but charge you interest on long positions.
Needles to say, thay pay you a lesser rate on shorts than they charge you on longs. Nevertheless, the interest you're paid on shorts goes some way towards compensating for the interest you're charged on longs.

The best shorting candidates are strongly bearish stocks in strongly bearish sectors when the overall market is strongly bearish.
If the overall market is flat, then usually you can find at least one sector that's heading south - this sector will contain many stocks suitable for selling short.

Since stocks and markets generally fall much faster than they rise, selling short a stock has the potential to create faster profits than going long. These profits can sometimes be substantial, due to the steepness and extent of the fall when bad news and/or fear sets in and people start scrambling to quit their longs.

Holding some shorts in bearish stocks can be an effective insurance policy to use in conjunction with your long positions. In a sudden market slump caused by a terrorist attack or whatever, those holding long positions will be hurting, while those holding short positions will be smiling.

Every serious trader should make it his or her business to learn how to go short. If you don't, you'll be missing out on a smorgasboard of profitable trading opportunities when a market or sector starts heading south.

I use IG Markets to trade both long and short in CFD's on the largest 1000 stocks in the USA.

Bunyip

 

[Porper]

Excellent post Bunyip,I think it is imperative to be able to short, or like you say, when the market turns down, how do you profit ? I suppose most investors/traders try to buck the trend or pull out altogether.Obviously the odds are stacked heavily against you trying to go long when the market sentiment is bearish.

I started trading CFD's using IG markets a couple of weeks ago.I haven't gone short yet but have a few candidates lined up for the inevitable turn in market sentiment.

You can't beat having the best of both worlds.

Just a word of caution, markets over time move up generally so going short in the long term is going against the general market direction.