Short Selling is the opposite of buying stock. When buying, we profit by selling at a higher price. Short selling involves borrowing and selling stock we do not own in order to profit by buying back at a lower price. It’s a strategy that can be used as a hedge or to capitalize during a bear market.
When done properly, short selling carries no greater risk than buying stock. Profits will often be realized quicker because stocks tend to fall faster than they rise as the emotion of fear is stronger than greed.
The ideal short sale begins with the right stock selection and the correct set-up. I often look for a liquid, volatile stock that has formed a good top after a large, quick advance and is attempting to break support. The on-balance volume must be falling, showing the sellers in control. It’s then a matter of identifying a point of entry that allows me to sell short at stop on the break of support while simultaneously placing a tight protective buy stop order to automatically cover my position in case the stock does not dump as planned. As the trade unfolds, I trail the buy stop to breakeven and below to lock in profits while staying with the downtrend.
Example -
Trading Tip: Avoid the stock everyone else agrees must crash. Be a contrarian.