Rules of Thumb For Shorting Stocks
Posted by Frugal on April 11th, 2007
I came across this excellent article that I want to share with you:
Here is the rewrite in my own words of Rules of Thumb For Shorting Stocks from Minyanville.com
- Don’t short because of valuation. “Expensive” stocks can become more “expensive”.
- Determine when the bad story will unfold. Timing is everything.
- Get out if it doesn’t play out within a time limit. You don’t want to be bulldozed over by “irrational exuberance”.
- Watch out for potential buy-outs. Don’t want it to ruin your day/year.
- Don’t fight with the big guy. A big stakeholder will probably do something to prop up the price instead of letting the company rotten.
- Big holding insiders are signs of confidence, if not heavy controls. Not the best candidate for short.
- An already-heavily shorted stock is really to your disadvantage, especially at the time when you want to cover it.
- Puts may be a better way to go.
- Trade in/out to be flexible.
- Do you basic homework in technical analysis.
- Don’t squeeze the last cent of the profits. Look at the risk of waiting to cover versus the potential reward.
- Understand the bullish side, and be totally unconvinced before you take big action.
- Employ ETFs. It will reduce your risk, and more importantly keep your calm.
- Make sure you can afford to take the loss if it doesn’t work out.
There are more times that I lost money when I short stocks. But I’ve found out that the primary reason is that I lost my emotional calm and patience. To increase your trading calm, you should reduce your trading size.
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April 11th, 2007 at 8:21 am
ive found that its a lot harder to hold on to shorts and wait for them to come back down (if you believe the shares are overvalued) than it is to hold onto a badly performing stock and wait for it to come back up.
April 11th, 2007 at 6:47 pm
I’ll just say that it’s much, much more difficult to go short than to go long. For one, many people have vested interests for the market to go up, and it does go up over time. So there is no equivalent to buy-and-hold in shorting.
Personally, I need to shorten my time horizon when I short and I need to take profits much more quickly.
April 11th, 2007 at 9:57 pm
Buy puts.
April 12th, 2007 at 1:43 am
For all the shortings that I’ve done, I was probably more than 85% right about my views. But unfortunately, I cannot hold onto my short position long enough, and lost money in probably more than 70% of the times.
The only good thing about shorting is that I always cut my losses. So my biggest losses never come from shorting, but rather from holding onto my losing stocks.
This is a lesson that I’ve learned, and keep re-learning (unfortunately). Trading is NOT to listen to your emotional self, but listen to your intuitive self. But the difference between your intuition and emotion is often so fine that it is hard to tell.
April 13th, 2007 at 2:31 pm
Frugal, enjoy your posts. thanks.
On a side note, do you know, the ad banner on top of the page is getting annoying. I understand ad placement … but thats just annoying.
Ohioan
April 21st, 2007 at 8:23 am
Ohioan,
I can understand your position. I’m not getting paid very much. I just need to justify my time spent here in some way. For charitable purposes, I prefer so much more spending my time at an orphanage or volunteer my time for any good community services (which I’ve done in the past). For monetary purposes, I am barely earning minimum wage blogging here.
So….It is how it is.