Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

morpheustrading

How To Find The Best Entry Points For Short Selling Stocks

Recommended Posts

Because fear is a more powerful human emotion than greed, stocks nearly always fall much faster and more violently than they rise.

 

As such, there are key technical differences in our trading strategy between the way we analyze and buy stocks, compared to short selling stocks.

 

First, it is crucial to realize that trading in the same direction as the dominant broad market trend is the most important element of our swing trading system because approximately 80% of all stocks move in the same direction as the major indices.

 

This is where our objective, rule-based market timing model really shines, as it prevents us from selling short when the main stock market indexes are still trending higher (or going long when the broad market is in a confirmed downtrend).

 

Although it may seem counter-intuitive to new traders, we do not sell short stocks as they are breaking down below obvious levels of technical price support, as they tend to rebound and rip higher after just one to two days of weakness.

 

Rather, our most ideal short selling candidates are stocks and ETFs that have recently set new “swing lows” (or are testing prior lows), and have subsequently bounced into resistance over a period of three to ten days.

 

Yet, even though we prefer to wait for a bounce before entering a new short position, we also do not enter a new short position while the stock is still bouncing (trying to catch the high of the bounce).

 

Instead, we first wait for subsequent confirmation that the stock is about to stall again. This typically comes in the form of either a bearish reversal bar (such as a bearish engulfing or hanging man candlestick pattern) or sharp opening gap down, which signals the short-term bounce is losing steam.

 

Similarly, we always take the same approach on the long side when buying pullbacks of strong stocks; we wait for a pullback to form some sort of reversal pattern before buying (rather than trying to catch the bottom of the pullback).

 

The daily chart of O’Reilly Automotive ($ORLY) below is a good example of what frequently happens when attempting to sell short a stock as it breaks down below an obvious level of price support. Again, entering a new short position while a stock is breaking down below the low of a range is not something we are very comfortable doing:

 

121024ORLY.png

 

A lower risk way of initiating a new short sale, which also provides traders with a more positive reward to risk ratio for short selling, is shown on the following chart of Check Point Software ($CHKP). This is an example of what we look for for when entering a short position (although the declines are not always as dramatic):

 

121025CHKP.png

 

On October 17, $CHKP gapped down sharply, on huge volume, due to a negative reaction to its quarterly earnings report. This caused the stock to crash through a four-month level of price support at the $44 area (dashed horizontal line).

 

But over the week that followed, notice that $CHKP climbed its way back up to test new resistance of its breakdown level.

 

If $CHKP subsequently manages to probe above the intraday high of October 17, it would see some short covering, as most traders would not have expected the price action to climb back to that level.

 

Further, the 20-day exponential moving average is also just overhead, which lends a little more resistance.

 

It is at that point ($44.50 to $45 area) that we would look for the first bearish reversal candle OR opening gap down to initiate a very low-risk short selling entry with a positive reward-risk ratio.

 

By waiting for a significant bounce into new resistance of the breakdown before selling short, we can “be right or be right out” by keeping a relatively tight protective stop.

 

Finally, drill it in your head that having the patience to wait for the proper entry points is crucial when short selling stocks, as the short side of the market is less forgiving to ill-timed trade entries than the long side.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Similar Content

    • By millonmethod
      Hello everyone!
      I am an advanced trader, with many years of experience (about 15 years - 10 living exclusively from this)
      I am going to give you some tips that you must know:
      There are going to be many people who tell you that trade is easy, that with only crossiing a line  with another one you will win a lot of money.... and that´s not true.  No, Sir, reality is far away from that. Many people who start arrive here with the hope that someone "gives them" a free method, they watch youtube videos thinking that this will give them the "strategy" and in a few days they realize that it does not work for them - they lose money - and then They go looking for a new one ... and so on. YES, IT´S TRUE YOU EARN IN TRADING, A LOT. BUT THINK: for a few to win (10% + any BROKER) many others must lose (90% people). YOU MUST HAVE A MONEY MANAGMENT FORMULA ( you can email me) People study so many years to live on this, not because they are dumb, but to know what they do, when, and have absolute effectiveness. It´s very easy to get lost here: do not disperse, jumping from one to another strategy WILL NEVER give you money, it will only waste your time and make you nervous when trading. PEOPLE WHO CHANGE THEIR METHOD CONSTANTLY : LOOOOSE ALWAYS.   If you have the knowledge to develop it, take your time and do it.  Always try it first on DEMO for at least 2 weeks! If not: search to buy a solid strategy (no you tube videos pleassse ! Avoid losing money! ) This is like any business, it requires some capital to start (capital = money in the broker + solid made /purchased strategy) If you are lost: I RECOMMEND YOU NOT TO WASTE TIME IN YOUTUBE, JOIN PEOPLE WHO HAVE EXPERIENCE AND IF YOU ARE GOING TO BUY A METHOD ... PLEASE !!!! DO NOT BUY 10 BAD AND CHEAP METHODS, SAVE MONEY AND BUY ONLY 1 BUT EXCLUSIVE AND MUST ALLWAYS HAVE SUPPORT !!!!!  Do not buy Signals! They never keep up with constant profits! One week will win and the next will lose. Nothing that does not depend absolutely on you will give you the money you are looking for. And if you do not have a strategy (made or purchased) do not even try PLEASE PLEASE PLEASE: DO NOT USE REAL MONEY! AT LEAST 2 WEEK DEMO FREE HELP HERE!!!!!  IF YOU FOLLOW MY ADVICE YOU WILL BE PART OF THAT 10% WINNER, email me.
      Have a nice trading day
       
       
    • By adamal7
      Hello guys,
      I'm starting to swing trade commodities, especially soft commodities (corn, sugar, coffee, cotton, soybean, ...). I'm also checking gold and oil.
      My problem is I'd like to know what is the best broker for trading those markets (regulated, large commodity choice) ? For CFD trading.
      I'm thinking of IC MARKETS who are very good with forex and have good trading conditions.
      The concern I have is that I need a broker that offers MT4 as a platform, and also I'd like to be able to open mini lots positions for a better risk management.
      As a swing trader, I'm less concerned by the spread but looking at the financing fees.
      Wish you have a nice day, and thanks in advance.
      Alexandre.
    • By trading4life
      Hello, My name is trading4life.
      I just joined this forum.
  • Topics

  • Posts

    • EU is still trading in a range. I'm heading out of town tonight and won't be back until Sunday evening. 
    • Came back to check on price after an hour of meditation, EU came within 3 ticks of target... Fascinating the ego brings up the story of betrayal, as if the market was out there to get me. I then reminded myself cool, this trade went over 2R. Even better yet, I acted consistently with executing my trading plan! Let the market do its thing. 
    • I took this limit long on the retest of the earlier 123 and support area. Target is near top of the zone. I notice that my target needs to be more mechanical in the sense that I may be influence to have a more/less aggressive target based on the results of the last trade. I have collected some modifications for the next batch of trades. 
    • Correction: the GU made it to 45 out of a 49 tick target. It was a 2.5R full target, not 3R. The EU long trade was 7:15am EST. I will refrain from getting up even earlier with the goal of not missing the next one. I notice after each trade, the mind, with the desire of wanting to experience a win, subtly pushes me to deviate from trading plan. My main concern with this set of 20 trades is build a greater sense of consistency in my execution and self trust. I realized the outcome of each individual trade absolutely does not matter. If I started to care about it, I am assuming that somehow I am responsible for the market's movement, which I am not. I am only responsible for following my trading plan, which can be adjusted after the 20 trades based on the stats I collect. 
    • GU closed for -1R. It made it to 2.8R but not quite the 3R. There was also a EU long trade that happened about 4:15am EST. FOMC is over now so let's see if we can get a nice trend setup today.  
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.