The latest addition to the Connors Research Strategy Series of quantified guidebooks details a core short selling strategy for identifying overpriced stocks throughout varying market conditions.
Short Selling Stocks with ConnorsRSI contains over 20 different variations of this versatile strategy – all with winning trade rates over 75% – and all structured around the exact entry and exit levels identified by ConnorsRSI.
Enjoy the first chapter from our brand-new guidebook, and start discovering a more precise, systematic way for short selling stocks.
Short Selling Stocks with ConnorsRSI – Chapter 1
For more than thirty years, the asset management industry has attempted to create firms and funds revolving around short selling stocks. Few (very few) have succeeded in the long term. Most of these funds (many now defunct) applied a single-minded approach to short selling: identify a company that is going out of business and short it.
For example, a well-known short strategy is to find the firms that are committing accounting fraud and short them. In the mid-90s I paid $10,000 for a one-year subscription to a research firm that specialized in identifying accounting fraud. The report that subscribers received spelled out in detail the depth of the accounting fraud a firm was committing. It was compelling. So compelling that of course I shorted many of these stocks. Unfortunately, the 1995 bull market began to take hold and in zero cases were any of these companies found to have committed fraud. In fact, many of these stocks experienced high double-digit (and in some cases triple-digit) gains over the next year. Fortunately, I was out of all of them before they maxed out; I was either stopped out by my own sense of panic or simply because my put options went to zero. Over the years, this research company identified about 200 suspect firms, of which three actually committed fraud. I was not a happy subscriber, nor were the many short or long/short funds who also subscribed. Needless to say, I didn’t renew.
There are other strategies which have been used by short funds looking for companies to go to zero: technologies that would become obsolete, competitors that would crush them, or the fact that the US economy was going to collapse and therefore every company along the way would collapse as well.
None of these methods have worked in the long term. Yes, some companies have been found to have committed fraud (Enron, Tyco, etc.), yes the US economy got hit in 2000-2002 and in 2008, but overall the performance of the majority of these short funds has been pretty dismal. The people behind these funds mean well. Most have conviction in their beliefs. But their track record proves just how difficult it is to make money in the long run by shorting stocks.
In this Strategy Guidebook, we’re going to teach you a quantitative, systematic way to short stocks that has proven to be successful for quite some time. There are no juicy stories here. This strategy is simply identifying behavior, backed by statistics, which has occurred over and over again since 2001. In fact we can show you this same behavior going all the way back to 1995. The basic behavior pattern is: when stocks become extremely overbought on a short-term basis they tend to pull back sharply for a short period of time. Few go out of business. However, most do pause, profit taking occurs, scared (long speculative) money gets flushed out, further pressure is placed on the stock as analysts’ price targets get hit, and in the majority of cases (approximately 70%, which is high) prices are lower within a few days.
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We first identified this behavior in 2003 and started teaching a variation of the strategy in our TradingMarkets Swing Trading College in 2005 which we still teach today. The concepts we taught back then still hold true today and we’re proud of the fact that in spite of markets changing, especially after 2008, the behavior of extremely overbought stocks has not changed. And this is where the Alpha is.
A few words of caution need to be made here. First, these are short sales, which means that the losses are potentially unlimited. Stops lower the test results but that doesn’t mean they should not be used; that’s up to you. The test results include all stocks which have met the entry criteria for the strategy, and some have risen by 50% – 100% before exiting. On an individual trade basis this hurts. But as you see on an overall basis, in spite of these adverse moves, the longer term test results are significantly positive. For those of you who understand the risks involved in options, liquid puts can also be used to contain the potential for unlimited losses, because your risk (total dollar amount) is known ahead of time.
In order to achieve Alpha, you have to go places others won’t go. Shorting the stocks in this strategy is a place most people psychologically can’t go. The edges have been there, as you will see in the statistics, but you have to be able to overcome the fear of shorting “story stocks” which have been run up to unsustainable short-term levels by “the crowd”. This Guidebook, backed by over a decade of statistics, will show you how to do this.
Click here to continue reading the rest of Short Selling Stocks with ConnorsRSI and to learn an easier way to sell short – backed by statistics.
Amazon Rated 5 Stars
First time I’ve seen a winning system for short trades August 13, 2013
Although short selling is appealing, it is also difficult to do in a profitable way. Testing shows that flipping the buy rules of a system to find shorts generally leads to losses. One reason for this is that stock markets have moved higher in the long-term and short trades are fighting that trend. That long-term trend makes it difficult to find mechanical strategies that work for short selling.
Adding to the difficulty of short selling is the risk. Losses are theoretically unlimited since the potential price gains of any stock are unlimited. As prices rise, traders with short positions will be required to add collateral to their accounts when the market moves against them. To overcome this problem, short traders need to have a high probability of winning.
In the latest volume of their Trading Research Series, Connors Research presents a mechanical short selling strategy that works. The system is based on the ConnorsRSI indicator, an adaptation of RSI that incorporates price changes, momentum, duration of the trend, and the relative magnitude of the price change into a single indicator.
Short Selling Stocks with ConnorsRSI presents simple and reproducible rules along with a number of variations on those rules that allow a trader to adapt the system based on their personal risk tolerance. One variation of the strategy has won 78.7% of the time and delivered an average gain of 9.4% in 10 days. I prefer the variation that returned an average of 6.85% in 3.5 days and showed 77.6% winners.
This is a unique book with detailed strategies that work for short selling, an area that has been largely neglected in the literature of technical analysis. Traders will be able to place trades on the short side immediately after reading this book. They will also have a detailed understanding of how to design a trading system that offers potential rewards based on mechanical rules and can then develop their own short selling strategies based on the ideas in the book.
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