When stocks are falling sharply, the idea of selling short looms large in the minds of most swing traders.
The problem is that the best time to think about selling stocks short is BEFORE they start selling off, not after.
This is why so many traders underperform. By the time enough of their indicators agree that stocks are moving down, they often have already traveled significantly lower. This puts swing traders in the difficult position of having to decide whether or not to “chase” the stock as it moves further and further away from them.
With PowerRatings, traders can take positions in stocks BEFORE they make their big moves. And this is true both for traders looking for stocks to buy as well as traders looking for stocks to sell short.
Consider ^XXIA^, a technology company that is a player in the 3G/LTE networking business. The stock had been climbing below the 200-day moving average, becoming increasingly overbought and earning major PowerRatings downgrades. On August 26th the stock was downgraded to 2 and just one day later the stock earned a further downgrade to 1, our lowest grade.
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Traders who began looking for opportunities to short Ixia over the final trading days of August were rewarded on August 30. By using a limit order 3% above the close of the day when XXIA earned its downgrade to 1, swing traders were able to get short XXIA at very overbought levels.
And traders did not have to wait very long to take profits, either. Shares of XXIA gained for an additional day, but sold off sharply on the following session, dropping by nearly 4%. This move lower enabled trader who had gotten short the stock days ago at higher levels to cover their positions, buying the weakness at significantly lower levels.
If you are looking to add quantified, short term stock trading to your overall swing trading portfolio, click here to learn more about PowerRatings. Featuring top stock lists for the S&P 500, Dow and Nasdaq 100, our PowerRatings stock lists will make it easier than ever to find the best stocks to trade every day.
David Penn is Editor in Chief of TradingMarkets.com