Short trading - What's your battle plan?

[sirpollicles]

Good morning another Monday trading day awaits us!

Some of you may have read my last post about msyelf making a booboo not planning etc etc.

Alot has been learnt from that post. I am very interested in short selling!

Alot of people too have been saying "you need a plan you need a plan". I guess now i'm looking for a suitable plan! I'm aware the decision is completely up to me, you can't give advice rah rah rah, i'm just wondering what kind of thing suits for a short trade which allows for fluctuations.

Is a good plan ie. obviously finding a suitable stock (blue chip better?), set myself a stop loss (4-5%) and also set myself a sell point (5-10%).

Is this viable, or is it all dependant on the market movements at the time.
It confuses me how 50% of peopel say "watch the market movements, trends and volume" and then other people say "do not alter your plan and stick to it"

Thanks fellow asfers!

 

[Tanaka]

Hi there sirpollicles,
Your enthusiasm to hit the markets is exciting. It sounds like your journey has begun.

Having read the difficulties you expressed with your first trade and your continued motivation, IMO hitting the books is the best step for you. I say this because I sense a bit of indecision in your planning/direction.

Trading is both an art and science, hence you feel confused about suggestions people have given you. Everyone paints differently, but in the end it’s a painting. You need to decide if you are going to paint an abstract like Kandinsky or an ultra-realism like Chuck Close, in the end, both are successful paintings. This also applies for trading plans, you realistically can’t ask others for their ‘battle plan’ and expect it is going to suit your situation, trading plans are case by case, everyone has different system expectancy, capital and risk profile. There is so much to be said on this topic. My last art analogy sorry : It sounds like you have the canvas, paints and brushes but don’t know what to paint.

There are thousands of threads already started that discuss money and risk management, read them. I also like the book ‘The Universal Principles of Successful Trading’ by Brent Penfold.

Books I think are good for beginners to intermediates ‘Trade Your Way to Financial Freedom’ Van Tharp and, ‘Technical Analysis of the Financial Markets’ John Murphy.

I could go on.

Please don’t feel dishearten by my response. After doing a lot more reading/research on trading, you will understand.

I wish you all the best!

Tanaka

 

[Gringotts Bank]

Have a look at:

1. "sell the fact" type set ups. Particularly if the 'fact' (ie. announcement) is below expectations.

2. Opening gaps that are much lower than the previous close, and with high opening volume.

3. The day following a large high volume spike. Shorting upon the open might work.

I haven't tested any of these. You can do that.

 

[Tanaka]

Have a look at:

1. "sell the fact" type set ups. Particularly if the 'fact' (ie. announcement) is below expectations.

2. Opening gaps that are much lower than the previous close, and with high opening volume.

3. The day following a large high volume spike. Shorting upon the open might work.

I haven't tested any of these. You can do that.

So... it might work?!? And are you going to help him with risk management and explain an exit plan. :screwy: How have your generalised untested comments helped ? The content of my reply was to broaden sirpollicles knowledge base. Gringotts please explain why you believe your untested ideas might help a beginner. Even if your answer was tongue in cheek it's not funny, sirpollicles is clearly a beginner needing help.

 

[Gringotts Bank]

So... it might work?!?

It might, yes.

And are you going to help him with risk management and explain an exit plan.

No, he can do that himself, along with any testing (manual or software-assisted).

How have your generalised untested comments helped ?

I gave him some fairly specific suggestions (not generalized) to look at for short selling. I don't want to spend time testing them for him.


Now a question for you: why are you angry at me? If it was something I said on the religion thread, feel free to disagree.

 

[Tanaka]

Now a question for you: why are you angry at me? If it was something I said on the religion thread, feel free to disagree.

Thanks for clearing up your views. I apologise if I sounded angry Gringotts, I find it hard to express intonation in text. I was trying to express frustration. My suggestion was about general study and you address some very specific trading ideas and backtesting. Judging by sirpollicles panic with his ILU trade, I think he would benefit more from basics of trading before he goes into backtesting.

Thank you for the backtesting ideas Gringotts, I’ll give them a go myself. And if I have misjudged sirpollicles learning needs I also apologise, I also hope he back tests them too.

 

[Reasons]

Alot of people too have been saying "you need a plan you need a plan". I guess now i'm looking for a suitable plan!

Is this viable, or is it all dependant on the market movements at the time.
It confuses me how 50% of peopel say "watch the market movements, trends and volume" and then other people say "do not alter your plan and stick to it"

Sirpollicles, if there are 30K traders on this site, every one of them will do something different to short the market. Here is one of them, with enough detail to get you into trouble if don't do the hard yards before entering.

I will try to answer your questions and give you examples of shorting trends and counter-trends. Trends are critical to understand as you usually want to be trading in the direction of the trend, or clearly understand if you are not, and how to act accordingly. In the counter trend short trading example below, the price action is making higher highs and higher lows (uptrend). If you go short at point 3 for example, you are going against the trend (counter) and if you think just because the trade goes in your direction that it is now going down forever, you would on probability be mistaken. In the example the price tends to go up once it hits the blue or red moving averages (MAs) on past history.

Volume for me is a just a quick visual for liquidity in a share so you don’t get caught in one that will be hard to sell out of at the price you want. It also occasionally gives you a bit of a clue as to higher selling or buying volume, but it is a non-event and off my radar as an entry or exit signal.

Your hope in this short trade is for it to go down to the red MA, but realistically it might only go down to the blue, based on probability of past price action (but, it can do the opposite and go up to the moon if wants to, so this is where you need to money-manage risk). Through doing lots of back-testing on this share and/or others, you decide you will enter any time you get a bearish candle as circled next to 3, and the price action has moved significantly up away from the MAs like it has, giving you a better chance for it to retrace down further. Your decide your profit exit is the blue MA. I personally use MAs as part of my entry/exit strategies.

You will find other things like MACDs and RSIs, etc. can help your entry and exit decisions. Have a look at the RSI on my example and see if it tells you anything when it goes above the line when compared to the price action moving down. Have a look at the MACD when it curves over at the top and moves down compared to the RSI. Ignore the MACD line crossovers, I find them lagging and irrelevant. You may see nothing, but over time and monitoring they can help. I also use weekly and monthly charts to confirm the faster daily timeframe to see what I can see in the MACD and RSI.

You then have to do your money management calculations and this is where you must do your written plan. Keep the plan simple, but document all the technical or other reasons that convinced you (based on what you have seen before lots of times through back testing) that, on probability only, you have a good chance of success (your win/loss ratio and profitability factors as back tested), as well as your critical money management strategy. Your profit target is in this case is the blue MA at $1.68. You put your stop loss one cent above the top of the top red candle at 3, being $1.86. You then decide if at 1:1 (you are risking a dollar to make a dollar) you have an acceptable win/loss ratio and if so enter the trade on the next candle at $1.77. Once entered, you trade the plan exactly. You get out if it goes too high on your planned stop loss or when it gets to your profit target. No adlibbing, no what ifs, no nothing. Just exactly to plan. You can use this plan to check later if it did not work what might have gone wrong. No docs, no review. No review, no learning. No learning, no money left. Simple as that.

Now in one final example, have a look at 1. The price action is now in a down trend. This can simply be determined because the price action is making lower highs and lower lows. The next lower high is yet to be confirmed, but if you get your entry signal, you could now short this down trend. NOTE - You would in this case be short and trading in the direction of the trend. Just one point about volume at 2. It looks like it is sort-of decreasing whilst the price action is going up. This could indicate it is losing buying momentum, but as it is a bit erratic, I am not very fussed at this point myself what it is telling me, I am sure others will be.

Be aware that you will likely not to be able to short many shares (top ASX 300 or so generally), depending on your provider.

I hope that helps you and others in some way; it better because it takes too long to write. There is obviously a bit more to it always, but that is enough to get you going. Remember what I have described is conceptual until you do the hard yards yourself and back test your own entries and exits. but these types of strategies do work. Also remember you are likely to get better win/loss ratios if you are going short with a down trend. Obviously you could reverse these concepts and counter trend long etc as you see fit. And lastly that trading is about probability not dead certainties and probability means that sometimes you will be dead wrong. Get your money management rules firmly in place.

Now go and do the hard yards before you go broke

Cheers

 

[Reasons]

One other important thing that you need to be aware about when shorting a share; in case you think it a good idea to go short the day before a share goes ex-dividend, or happen to be holding, be aware that YOU have to pay the dividend to your provider. No free lunch there. However, you should get paid some pathetic level of interest whilst in the short. The same applies to trading share indicies when dividends of any of the underlying shares go ex-dividend.

 

[tothemax6]

Were I to be in the business of selling stocks short, it would be done in this manner:
'That company looks over valued and due for a correction'
<short the company>.

Did you want more detail?

 

[skc]

Were I to be in the business of selling stocks short, it would be done in this manner:
'That company looks over valued and due for a correction'
<short the company>.

Did you want more detail?

What's that old saying? Market can stay irrational longer than you can stay solvent.

This is especially ture when you short.

 

[tothemax6]

What's that old saying? Market can stay irrational longer than you can stay solvent.

This is especially ture when you short.

Yes, one of Keynes's sayings - one of the few things he got right.

Of course, I would be mostly long the market whilst shorting a specific company. This way one is hedged against the broad 'equity vs cash' moves of the market.
I read a great book about hedge funds (titled 'more money than god'), and its interesting to note that many hedge funds knew very well that the market was in a bubble (e.g the japan bubble), but its very difficult to have the discipline to remain market neutral when stocks are rocketing upwards and everyone else is getting rich. Its even more difficult to try and pick the top and short the market, since a miss causes financial obliteration.
That said, people do manage it. John Paulson made billions on the 2008 crash.