When I find a stock that I want to short, how do I trade it? My opinion about a short is not sufficient for a trade, the chart has to agree with me or I have to wait until it does. Here are the charts of four profitable short plays I had this year. While I did not catch the full moves I caught the meatiest parts for very nice profits. My system is to find a falling leader in a market correction like Apple. Or I will short the stock of a company that has made major missteps and caused a downtrend based on fundamentals. My initial short entry is when it closes below the 5 day exponential moving average. I will hold the short position until one of three things happen.
I exit the short when:
- It closes above the 5 day ema. (Moving average stop.)
- It closes at the high of the day. (I will get out in the last thirty minutes of the day it is closing at the high of that day.) (Candlestick stop)
- It plunges and then reverses doubling its normal daily trading range closing near its highs. (Volatility stop)
I only risk 1% of my capital on any one trade.
I use in the money stock options the majority of the time so it has built in risk management so I do not need to set intra day stops. I position size to control risk with the options.
If I am stopped out of a short I will re-enter when the stock drops back below the 5 day ema. The key to this system as for all trend trading methods is you have to have small losses and huge wins for it to be a winning system. If you have an ideal entry after the stock plunges below a major support like the 50 or 200 day simple moving average that can also improve this systems performance by catching the monster trend.