How to short a stock in three easy steps

Discussion in 'Trading' started by Sotnis, Oct 21, 2015.

  1. Sotnis


    Many investors try and short a stock way too early as they believe the stock price is way overvalued. However many times a stock that is overvalued in price may become even more overvalued especially when the stock market is in an extended upward move. From my experience, the proper time to short a stock is after it has encountered its first strong downward thrust and bounced for a short period of time which sets the stage for a second move to the downside.

    Let's look at an example. NTES which made a huge move in 2003 eventually peaked in October of 2003 and then made its first strong downward thrust (points A to B). Notice how NTES then found support near its 200 Day EMA (purple line) and 50% Retracement Level near the $40 level. After finding support near the $40 level NTES then rallied on below normal volume but encountered resistance at its 100 Day EMA (green line) and 38.2% Retracement Level near $48 (point C). This set the stage for a second short opportunity as NTES began to stall out near the $48 level.

    In this example NTES could have been shorted around the $48 level with a Stop Loss Order placed just above the $50 level just in case NTES broke to the upside instead. During the month of December NTES fell from $48 to $35 a share but did find support just above its 61.8% Retracement Level which was near $34 (point D). Thus investors could have covered their short positions at one of two prices with the first at the 200 Day EMA near $40 and the second near the 61.8% Retracement around the $34.


    So, the best time to short a stock is to wait for it to bounce after it makes its first major thrust downward, after going through an extended upward move, and then try and catch the second move downward. When looking for stocks to short make sure they are exhibiting these three characteristics.

    1. The stock has already undergone one significant move downward after making a top.

    2. The stock then finds support at a certain Fibonacci Retracement Level or Moving Average and rallies on poor volume.

    3. The stock then stalls out near its 38.2%, 50% or 61.8% Fibonacci Retracement Level or Moving Average after rallying.

    By following these simple rules investors will have a much higher success rate when attempting to short stocks. GL!