Here’s My Short Selling PowerRatings strategy
Recently several people have asked me how to incorporate short positions into their accounts. First off, I want to be clear, that although I enter some short positions, the shorting portion of my account generally does not outperform the long portion of my account. Generally, if you back test short strategies, they consistently underperform long strategies. So, why should you use a short strategy…to hedge your account, reduce the volatility of your account, and to make a little extra money (I said that they aren’t as good as long strategies, not that they weren’t profitable). This should make sense that long strategies outperform short strategies–past market data shows that there is a persistent edge to the long side (0.04% per day in the S&P500).
Despite the fact that long trades outperform short trades, I do take some short positions that I feel have a worthwhile edge for the reasons I described above. I have not been able to find or come up with anything better for shorting than PowerRatings. I will share my strategy that I use with PowerRatings data.
The stocks ranked 1 performed 4.9x worse than the S&P 500, compare this to the stocks ranked 10 that perform 16.9x better than the S&P 500–again most data consistently finds that long side edges are more robust than short side edges, so these are the stocks that I would use to play the short side. I think that
the 4.9x edge is just strong enough for me to be interested in taking these plays to the short side. Additionally, I add on another filter, to improve performance even more. The filter I use is, is the stock above or below it’s 200-day simple moving average?
Past data shows that the indices perform much worse while under their 200-day MA; therefore, I have extrapolated that information to individual stocks as well. Thus, I look for stocks with a PowerRating of 1 that are under their 200-day MA. One last criteria for myself is to see if I can trade options on the stock (I wrote about this in my blog, but I don’t think that this is a necessity). After this, we have a list of stocks that we are going to sell short or buy puts on. Please remember your position sizing to control risk.
Now, no system is complete without an exit point that is defined BEFORE you go into the trade. As many of you know, I think that the 2-period RSI is a wonderfully powerful indicator. Therefore, exit your position when the 2 period RSI closes at 25 or lower. That’s it. I have been using this for several months, and have done very well.
One last side note. Recently, I started entering only those trades that showed up on the list as a 1 for two days in a row. It seems to give you less trades, but the trades are more robust.
I hope this helps,
Steven
Steven Gabriel, MD. is a self-taught trader who primarily swing trades for his own account from his home in Orange County, California. Steven has been trading for 8 years and is a systematic trader. He uses stocks, single stock futures, options, and e-mini’s for both risk control and leverage. Steven is
also a board-certified physician in Emergency Medicine and still practices medicine in southern CA. You can contact him at stevengabriel@mac.com.
Read Steven’s blog “Almost Trading For A Living“.
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