There are many thoughts and opinions on shorting stocks around the market; however, one thing is for sure, a well rounded trader is going to tell you that having the ability to short stocks in your stock trader toolbox is a “must-have”.
Thanks to Investopedia.com, they provide an excellent definition of “what” shorting stocks is for those traders who may not quite understand what I mean,
when you short sell a stock, your broker will lend it to you. The stock will come from the brokerage’s own inventory, from another one of the firm’s customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must “close” the short by buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.
Why is shorting stocks so valuable to have as a strategy? Simply put, it allows you to profit no matter what is going on in the markets, and even more-so, no matter what is going on in any specific stock.
Instead of me turning this into a boring lecturing article, I am going to use a ‘real life’ example that, at the time of the writing of this article, is literally playing out before my eyes.
The Initial Stock Chart Set-Up
I originally alerted VIVUS Inc. (VVUS) as BOTH a ‘long’ and ‘short’ technical stock chart set-up to my private trading group on 1/24/14 in the weekend Power Profit Scans exclusive newsletter. At the time of my alert, the chart appeared as follows (the annotations you see were also in place at the time of the alert).
You may be thinking, “Why did you alert $VVUS as both a ‘long’ and ‘short’ play?”. In fact, I actually had one member of my trading group email me and ask, “Hey Clay – did you have a typo? I see you had VVUS in both categories.”
This was not a mistake in the least. For the stock trader who goes both ‘long’ and ‘short’, this set-up was the best of both worlds. Not only was it a great Risk vs. Reward for long players, but if certain price action dynamics took place, it would then become an extremely attractive set-up for short players.
The Journey of a Well-Rounded Trader
The best way to illustrate this is with the updated $VVUS chart below. Each number on the chart represents a “decision point” in a well-rounded trader’s journey through this trade. Be sure to pay particular attention to Point 2 as that is where all the magic happens.
Point 1
This is the area where the trader decides to go long at $8.00. From a technical chart perspective, this is a very logical entry point. It is also a very logical area to be watching for a potential short trade.
The trader buys shares at $8.00 and immediately determines their stop-loss will be at $7.80.
Point 2
In a relatively short amount of time, the trader’s long position goes against them. Because they are a well-rounded trader, that not only means they short stocks, but it also means they are overall disciplined traders. With that being the case, the price hits $7.80 and they exit the trade for a $.20 loss.
This exact point in time is what separates the boys from the men and the girls from the women. Are they going to trade like a politician and reverse their “thoughts” on the stock, or just walk away with their $.20 loss?
The grown up stock traders, who were following the most important rule and listening to the technical chart, would have solid for a loss and then immediately entered into a short position at $7.80.
Point 3
At this time, the trader just needs to decide whether or not they want to lock in any profits. Since their initial $.20 loss (long trade) and new entry at $7.80 (short trade), they have now experienced a ‘profit window’ of $.90. At the time of this writing the lowest the share price has gone is $6.90 (with even more downside potential).
Conclusion
Everyone’s mind works different, so I wanted to illustrate this concept in two ways.
From a strictly math perspective, you can see that after losing $.20 on the ‘long side trade’, the trader would have then had a $.90 ‘profit window’, hence leaving them with $.70 in gains.
From a visual perspective, simply look at the two boxes. Look at the size of the red one (representing the size of the loss), not too big right? Now compare it to the size of the green box (representing the ‘profit window’ of the potential gain).
Do you see why discipline (keeping your losses small) is so important? Do you see why having the ability to short is so important to being a lethal trading machine?
Bottom line, shorting stocks opens you to a whole new world of possibilities and opportunities as a trader, and as you just saw from a ‘real life’ example, these can be some very beneficial opportunities.
Time to Get Serious About Your Trading
If you want the maximum amount of opportunities in the market, shorting stocks is something that needs to be done.
You have now seen the benefit of being able to hop back and forth from being ‘long’ to ‘short’. You no longer have the excuse of “I didn’t know.” It’s time to do something about it!
My recommendation is to check out my instant download course on shorting, Shorting for Profit. This is a course with over 13 hours of video and teaching, so even if you have no idea ‘what’ shorting is, by the time you are done with this course, you will be a shorting machine!
I would also like to personally invite you to join myself and other top notch traders in the private trading group, otherwise known as The Inner Circle. If you want profitable trade idea like $VVUS turned out to be, then this is the group you want to join. You can CLICK HERE to learn more about the group and what it is all about.
Other then that, I’m not going to sit here and give you a hard sales pitch on how I can help to make you a better trader. I would ask that you at least click HERE to read 3rd party testimonials and feedback from other traders who have already joined the group. You will quickly see that, for the price, it is a very logical decision.
