Proper Short Technique

M

Mr_F

Hi All

I am new to daytrading. I used an internet broker for three years and am now with IB. Wow, the difference is as going from night to day.

I wish to have advice on the proper technique to enter and exit a short position on an intraday basis. I know this is an open ended question, but I have yet to short a stock and would like some guidance.


Regards
 
That's a pretty wide open question. First, this discussion assumes that you've become proficient at trading the long side of stocks (i.e. proper stop management, risk/reward prospects, chart analysis). If so, then trading the short side is exactly the same, just in reverse. Based upon your analysis of the price action, chart, and market conditions, you simply enter your sell order on the stock. If going after a bid, you must make sure that the bid was an uptick. Otherwise, you'll have to post your short as an offer and wait for someone to hit your offer. If your entry and analysis was correct and the stock begins moving lower, then based upon your stop management or price target, you cover your short by buying the stock back and pocket the profit. If however, the stock moves up from your entry point, then based upon your stop management you may have to buy the stock back higher for a loss. The best way to get comfortable with shorting is to actually just do it and get a feel for the mechanics of it.
 
Thank you zboy. Would a stop be more prudent, or is the stop limit the recommended way to go?

Another question relating to the market downturn last week. Assume one has a covered call position (out of the money), or one has sold put contracts, and the market (and thus the subject stocks) begin to head south. Would taking a short position be the prudent thing to do in both cases?

Regards
 
Regarding stops, it depends upon whether you're watching the stock in real time or you enter a trade and leave it unattended. I personally monitor my trades in real time, and therefore don't actually enter stop orders, they're simply mental stops that are triggered by the stock's movement. So if I see the stock trade above a certain level, I simply fire in a buy to cover order manually. If however, you are not monitoring your trade personally, you're probably better off with a stop market order, so that if the stock trades through your stop price you'll be guaranteed to get out for sure, whereas with a stop limit there is a chance of trading through your order and you don't get filled.

With regard to your second question, as long as your brokerage allows you to flip a covered call position to essentially a naked call (i.e. selling or shorting the underlying stock), there's nothing wrong with going short if that stock and the market is heading south. In that scenario, you have a couple of choices. You could cover your short after a drop and go long the stock again, thereby re-engaging your covered call position. Or you could simply cover your short AND cover your naked call position, which would also give you a profit if the underlying stock has fallen, and then you'd be free and clear.
 
Timing ! I feel that the best shorts are over as of last year.(yes the bold made a killing in shorting just about any of the dogs in the NAZ). You can still selectively do it on index(SPY,QQQ) or futures but I would be very cautious shorting individual stocks. Don't chase them !!! Also if you are very patient we may have some bear rallies this year in which case you may succeed with shorting the NAZ.
 
Thanks zboy. As a test, I went short and used a stop. Result was I got burned somewhat when it turned into a market order. You are right. The best way is to to watch your position vigilently and use mental stops.

andrasnm
From what I have heard the shorts are up to there eyeballs in this market and there will probably not be any covering for at least 2-3 weeks. They jumped in big when the warnings came out on the Japanese banks. So are you saying your play is to get long on some NAZ stocks or the QQQ, ride them up on the bear rally and then short?
 
Today and yesterday it was a good(prudent) thing to short
the indecies. What I am saying was that it's a huge difference in shorting QQQ, SPY versus picking a stock to
short, I never said going long. Of course you can pick a
strong rally (which by the way I have not seen for a
while) and do it. The risk/reward in shorting stocks
is vary bad, now I know daytraders will disagree here but
the have the 'luxury' of watching the tape like a hawk and
move out of the way in there is a shirt squeeze.
 
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