If You Go Short, Consider This…
The market bounced up today on light volume. Things
still don’t look good to me. Nothing I talked about in my market report
last Wednesday has changed. The short side may begin providing the best
opportunities very soon. Speaking of shorts, I had an interesting conversation
with a fellow trader about taking profits on short positions recently. Here are
some of my thoughts on that subject:
For short-term
traders, most short-selling techniques may be executed by simply reversing
long-side strategies. This applies both to entry and exit strategies. For
intermediate-term traders, the game is a little different.
Although many
entries are quite similar (inverse head & shoulders, flag breakdowns, etc.),
when and where to take profits is a bit trickier.
With long positions,
most O’Neil-type intermediate-term trades take place at or near new highs. Most
intermediate-term traders will use fairly loose stops so that they may take
advantage of the upmove as long as it lasts. Since the stock is already at new
highs there is not any price resistance above it that needs to be worked
through. (Although some traders may look at Fibonacci resistance levels.)Â
Theoretically, the sky is now the limit. Who knows how high your new position
may go? It might double, triple, run up 1000% or even more. You might be
buying the next Microsoft before anyone else has even heard of them. Perhaps
this is the trade on which you can retire. While that is a bit pie-in-the-sky,
there really is no theoretical limit to how well your trade might do.Â
Therefore, employing a fairly loose trailing stop technique to allow your
position enough room to work makes sense.
^next^
When dealing with
short positions, that dream of 100%+ returns and early retirement no longer
applies. You can’t make over 100% in a short position, and realistically you
can’t even make that. Your broker will call in the shares and force you to
cover before the shares are deemed completely worthless. Therefore,
intermediate-term short positions should be viewed differently than
intermediate-term long positions.
One way in which I
would view short positions differently is in how I react to a large, quick,
profit. If a long position runs up 25% or more shortly after entry, it
increases the odds that the stock may turn into a huge winner. When I see that
happen, I look to hold on to all of my shares and trail the stop up slowly.Â
Sometimes I’m wrong and end up getting stopped out at breakeven, but even if
just a few go on to huge 100%+ gains, then it’s worthwhile to make sure I don’t
take profits too quickly.
On the short side,
with no chance of such massive gains, I will quickly either take partial profits
or tighten my stop dramatically on a part of the position. No sense letting a
25% gain on a short position get away. That’s a nice trade.
I will also look for
profit opportunities in places that I wouldn’t normally for a long trade. For
instance, if there is a very wide range bar or large gap open in my direction,
then I many times will look to cover additional shares.
For short trades the
potential gains are less, which also make the potential holding period shorter,
and should change your mindset when thinking about taking profits. Don’t be
afraid to ring the cash register on a good trade. Your going to need to take
some profits to offset those trades that turn into losers.
Good Trading,
Rob Hanna
Â
Â
Â