al buying is apparent. There are occasional favorable
gaps up on earings releases, but I've found this does not occur nearly as often as a “why did it tank on
good earnings" type play. I'd be more inclined to short into earnings releases than go long, particularly for
stocks whose month over month earnings have been declining (see www bigeasyinvestor com for
summarized table of monthly earnings and share price ‘volume changes at the bottorn of the "screen)
+ Market and Sector relative strength or weakness: be sure to keep an eye on sector charts like $GIN$SOX $RLX etc as well as the overall market to capitalize on strong or weak sectors, look at these charts incomparison with each other (and the "lead stocks" within each sector) as well as the specific stocks you arefollowing.Module Shorting Skiils for Active Traders: s#PREMOUS NEXT ®
FiveBack toMODULE 5© Introduction to Shorting: DTU Short Trading Rules & Tips@ Main Points:
© I youte like most traders, you're uncomfortable » If youve ever bought stock long on margin, youre doing thewith the idea of shorting. Traditional stock same thing a shott seller does. borrowing something youInvestors are trained to think that "Ifl buy a dont have, with the intentinn of paying for it laterstock and hold it long enough it'll surely go up". * Shorting is for rnore experiencec traders, eg at least 6you bought and held from the last few months months to a year full-time experience, or 2 years +of 1999 til now youte in the red. occasional swing trading experience.
= You may be reading this thinking to yourself, = [will show you the best ways to short stocks in this“well I'l read what he has to say but | probably module, using current examples, and information notwon't ever short anything". Right? available anywhere else
» By the time youre done with this module, | hape * Take a look at our Short Trading Rules to Live By below,youll learn to recognize and see the profiable and memorize them if you plan on shorting. They shouldopportunities that are available to you by adding help you immensely, in learning how to trade the shortshort selling to your arsenal of trading side.techniques. » Do not underestirnate the value of shorting, or avoid it
« There is very little out there on shorting, only 1-2 merely because it's not what you'te used to. That's like nothooks, an audio and avideo That's it Yet trying Chinese fond because youve never eaten it beforeprofessionals are always used to selling short. Expand your menu cf trading choices to include shortingSo should you. It’s like “working an order the as a common and viable way of tracing.other way around”. Uncomfortable at first, but it © If you're wrong in a stock going long, consider not onlystill works. I'l give you what you need to know. stopping out but reversing your position into a short at the
© Here's an exarnple (from my mgmt. training right tirne as well... same thing for winning long positionsdays) I want you to cross your arms, folded that ere reversing, you can sell it out at 2 profit, then enteracross your chest, right now as you're reading a short and ride it down to an intraday support level,this. Go ahead. Ok, ncw unfold thern and cross covering to make another nice profit.therm the other way, putting your tight forearm Dont just ride the curve up, make money on the sellingacross your left one. it's uncomfortable, right? ton why not? Once you hecome more familiar with it,But, both ways are equally successful at shorting is a handy way to make a lot of money. If you hadkeeping your arms folded on your chest. Change shorted all the Jenuary tops you'd be much wealthier thanis uncomfortable for many, but necessary. losing buy-n-helders are, who are sitting in red positionsShorting ts the same. waiting for a bounce. Right?
Short Selling quick intro:
What is shorting? Shorting is simply selling a stock first, then buying. You're borrowing the shares from your broker tosell to someone elso at one price, in the expectation that the stock's price will decline from where you bought it. Youthen buy the stock on the open market later, so you can repay the broker the shares you borrowed from him
What's different about shorting? Weill cover the “uptick rule" in the next lesson, basically it means youve got to enteryour order (to sell) only when the stock's price has just had a positive transaction, eg the arrow in your stock mindershows a green up atrow, not a red down arrow. This means you may have to try to enter a short order several times tocatch the uptick
Isn't sharting dangerous and risky? The only risk 1s thal ifthe stock price goes up there's a lot of possible risk if youcan't keep a stop loss. A long trade of 100 RNWK bought at 41 means you have a $4100 investment at stake, it couldconceivably drop to zerc, in which case you'd lose $4100. if you shorted RNWK at 41 it could run to 210, and you'd oweyour broker the difference, or (21U-41=169) or $16900. If youte not good about taking stops, then you shouldn't evershort. Or go long, for thal matter. Taking stop losses is especially important in shorting
Rule #1: Never hold short pesitions overnight
Why this rule? Because | want to minimize your nsk to upside ovemight gaps. if goodnews comes out, orthe futures are way up, causing a lot of gaps up, your short couldcost you a lot af money.
[recommend only irtraday shorting, never ever "swing short" in my opinion. Therisk:reward ray not be as good. Of course, many traders do just fine with 1-2 weekshort positions, but it's not a trading style I'm comfortable with, | wouldn't be able tosleep, wondering if good news will cause my shorl to gap up against me the nextmorning
Look at stocks like CIEN CNXT ete with recent large gaps Shorts would be in a badposition if they held shorts oveight.
The rule of “never take home ¢ losing position" is especially true of shorts I the stockgoes out strong, t's likely to gap up or have a next strong day, so, dont take it horeshort. tt just isnt worth the risk
Rule #2: The best time to short is on an open gap up of over 8%
We will cover this with many chart screensnaps and video clips in the later part of the moduleOpen gaps up are the best short candidates, just as open gaps down are the best longcandidates, if it happens on strong volume and you see sellers begin to appear.
The larger the gap up is, the more likely a retracement back down will happen. Think about it, ifyou had a position in KLAC from 53 and it gapped up to 62, wouldnt you want to sell it on theapen? Most other people would too, so this is an idea time to sell stock as well, shorting it,then covering al the fibonacci reiracements, eg down 38% from the high, roughly a third down
if you see a stock gap up over 40-50% (rare, bul it happens), look to short it as well This isone of the valuable parts of looking at the "Day's Gainers" lists early in the morning... even aslate as 10.00... look for the stock to begin selling off into the gap up and fire off a shott, using astop at the previous high forthe day
Rule #3: The next best time to short is after a stock has lost a key support leveland is making a new low for the day
Ifa stock is in a technical downtrend, eg a series cf lower lows and lower highs, you will want to short the next lowerhigh after its lost a key support level, particularly a decade number.
For example, if RNVWK loses 40, you'd look to short at 39 3/4, wilh a cover stop loss al 40 1/4 or so. You'd have anexit target of 37-38 1/2
This play is good for the first trading hour in the morning, as well as lunch and aflemoon selling pressure Look tashort the second time a new low of day is hit. We'l| show lots of annotated chart example in future lessons. Use atwo-day chart here too, eg always look to shor! 2 new 2-day low, and buy a new 2-day high. Many professionals usethis technique as well. | always use 2-day 3min candle, intraday 1-min stochastic, and 10day 15 min candle chartsto trade.
Always pay attention to the sector and broad market indexes: short stocks on weak days, buy stock on strongdays Do not fade (try to utguess a reversal in) the overall market trend! Buy strong stocks, sell/short weak stocks.
Rule #4: Other times to short are the reversal of an uptrendwll oo 12:00 on much wahmase
10am tops reversal shorts: This is your chance to profit from the classic "gap and trap" play that market
makers like to do. On stocks that put in a 10arm high (that is Not a 2-day high), you may want to short it ifit starts to get selling in a "micradowntrend” This one is a bit riskier, sa be sure to put a cover stop loss atthe immediate previcus high
Lunch weakness shorts: A slightly better time to short is when the market starts to drift downwardsduring the 11:30 to 1:30 slow lunchtime, since this is when many market makers like to bully stocks downso they can get a low of day price to sell back intc afternoon kuyers. So, shorting a stock that's making anew low of the day at around 12:00 is usually a good time to short.Rule #5: It is too dangerous to try and “catch a rising knife" andshort a momentum stock's top.
Okay, fess up - how many of you have been cut trying te catch a bottom far ¢ stockyou think is going to bounce up? Weve all done it Shorting mornenturn stocks isthe same exact thing, in reverse.
Do not aver, repeat ever! try to predict the top of a strong stock that has a lot ofbuyers in it. When demand exceeds supply, price goes up. It is difficult to nail theexact top of stocks that rise, say, 5-10% in 20 minutes on a hot news story
This, unfortunately, is how many traders try to get started with shorting, and theyget burned more often than they correctly quess the top. Ye want to use technicalanalysis, Lil and other indicators to trade, not quessing
Once you understand true market dynamics, you'll realize that you dont want to tryand guess a top for a hot stock. You may get a short off on a wiggle, right beforethe stock expiodes to a new high. Shorts are often "squeezed" here, as everyonerushes to cover their short positions. The market rnakers step off, and the priceruns. These are good opportunities to get long, when 2 new high is made. Do not tryto short momentum stocks unless youte very fast, have very tight scalping-typestops (eg 1/4 point absolute max, 1/4 better). An exception might be if the stack isup a ridiculous amount for the day, say over 80%. eq | nailed the XING top at492%, but those are very rare times 99% of the tirne you'll want to avoid shortingmomentum runners
Rule #6: Use a cover stop loss at the most recent intraday reversal
 
Let's say you short CSCO after it loses 60 support, making a new low for the day. Youget the short off at 69 3/4. It wiggles up a bit to 59 7/8, drops down to 59 1/4, then runsback up to BO, then goes to 60 1/4 and beyond.
What's the proper way to have managed this trade? Your cover stop loss should be a bitcover at the support level that the stock lost that caused you to enter the short in the firstplace, If you shorted because you think 60 was a key support level that was lost, andyour reason for entering the trade is proved wrong, eg they take it back up over the 60,then you'd want to cover night over 60, at 60 1/4 max.
Rule #7: As with all daytrading stocks, makeover 800K volume. Check that brokeries Se ers She ot ere
These should be common sense, but they're worth noting nonetheless. As with allintraday trading you, volume is your insurance, and helps you take your stops quicklyand at a good price Only trade stocks with an average daily volume of over AUO,000shares.
If youte trading a thin stock, you may not get filled til way past your stop, costing youmore than you wanted to spend, in the event that you're wrong about the price direction
A-second note: check with your broker to make sure shares are available to short Youdont want to correctly identify where to short, then try to enter the order and get a“shares not available" message. Also note that all shorts are done in your marginaccount, and thal stocks that are non-marginable are not shortable either (includingunder-§5 stacks)
Okay, let's move on to some chart patterns and examples.Module Shorting Skills for Active Traders: “4PREVIOUS NEXT ®Five E* Open Shorts: The Safest and Best Short Play wenn -@ Main Points:
Shorting stocks that have a large gap up onihe open on news are often profitable. You want10 avoid shorting good eamings release gapsand buyout gaps though.
‘You should look to short overreactions to news{eg gaps up over 15%) on high volume (eg over0K shares premarket) within the first 10minutes or so of the market open.
The other way to short gaps is to short a stockthat makes a small gap down premarket andcontinues selling after the open, eg 1/4-1/2point, and loses a 2-day support level, makingnew lows. (eg ALTR closes et 48 3/4 near thelow of the day, the next day's premarket tradingat 48 1/4, it loses 47 3/4 on the open at 9:30,short it here with a cover stop at 48 and an exittarget of 58 to 112 points etc )
As always, it’s a good idea to place a closeshort cover stop loss right above the exact openprice as well, in case buyers keep coming intothe stock
In general, you want to see a bit of a downtrendon the gap cccurs from where the stock wastrading premarket. For example, if it closed at36 1/2 the night before but gapped to 40 3/4premarket the following day on news of a newcontract being won, then sells down to 39 78 bythe time the market opens at 9:30, you'd want toconsider firing off a short on the open (using acover stop loss at 40 1/8) and an exit target ofroughly 1/3 the retracement, at 36 142.
How to Trade Open Shorts
Here's a perfect example of an open shortplay, for a stock called GALT that gapped upover 30% premarket on Oct. 17th.
The 2-day chert to the right shows the stockclosed at right over 30, and doesnt trade onmuch volume. After a positive news storycame out, the stack gapped up to 43premarket on high volume (over 100K shareshad traded before 9:30am on 10/17).
shorting
ear =| Jirtewachat =) PI
You can also short minor gaps down, as well asmejor gaps up, as follows
Let's say a stock closed at 28... near it's low ofthe day Then the next day it gaps down a bit to27 3/4. You might want to fire off a short at themarket open (9:30-9:35) with a cover stop loss at78108. You might look ta cover it near a 10-daysupport level, or, use a trailing cover stop about4/4 behind where the stock is currently trading et.Do not short major gaps down on the open. Theytend to attract buyers.
You could short @ major gap down stock if it's stillselling off as of 10:15 am or so... just dont try toshort big gap down stock... the “trade potential”is largely gone cn the short side, as people whowere short from earlier will probably look to covertheir shorts (these are the “dead cat bounces”that you can scalp on the long side oftentimes).Take a minute to review IiodiLesson10 and thenext lesson as well, click here, for some basicgap info as well.
Let's look at a few charts here to look atexamples of shorting on the open. Again, dontshort premarket... but, look for short opportunitieswithin the first 5-10 minutes from 9:30-9:40, forthese chart pattems below:
 
-4
 
OpenGap--> gyC=)Wait for the stock to Inse # SHORT 39 3/4
a key Support level, eg | %decade 40, before --;- COVER36 -| 36-4- 34
a Nha, 32
You do Not short stocks that gap up on babe toate Poe on
good earings, in general, eg MSFTgapped up over 10% and kept going up afterthe open Be selective, and first “wait forthe stock to lose a key support levelbefore shorting it on the open. This is themost important thing to realize about openshorts. You do Not just short it because it'sup 30%, it could run to +42% before topping.Let the chart tell you the story, short onlyafter it loses @ support level
 
ohana
In our Trading the Open live trading room, |acvised traders to “Short GALT if it loses
Cepmitie2000 Dt Erodeatng Corp. | ‘Stow Stochorts
   
40 support, say at 39 3/4" (exact quote). | 40:00 11:00advised tham to cover around 36 or so (fiboretracement). This was a great trade! Hope Oren) Or TAO)
 
 
 
this makes sense 40 (decade number) iswhere | pegged support. It could havereversed above 36, so that’s where wecovered (it's ok that we didnt’ get the fullrange of the short, we're happy to takealmost 4 sticks (points) on a $40 stock!
Let's look at some mare examples.
Ebay had ran up to 60 and consolidatedthe day before here (Oct 17, 2000), right EBAY [interval Chat
before the close It ran up a bit more on the fear E[fieewsichon =] PI IW S/S/es/ 4]open here, consolidated a bit more for the
first hal hour, then losed 60 support (twice, adouble Scttorn)
‘We would have been stopped out for a- 38or so loss the first time, but on our re-short
(2nd time it lost 60), we sre in for a nice winas il dropped to 49, consolidated, and sold
off down to 55, where we cover, fara +4 3/4win
Note the key when we're wrong, ifil "shakesus out”, like it did the first time, is to keepthe cover stop loss small, say 3/8 to 1/2point max.
This example shows you about breakdownsbelow consolidation (choppy undecided}trading Zonas that last ‘or 5-10 minutesbefore the trend is re-established one way orthe other, on open gaps up.
Here's Oct. 17th KLAC, a semiconductorcompany - notitce we could have got an openshort off at 32 on the open, if we were fast.however | like to wait til it loses a keysupport leval, my favorites are decadenumbers since level 2 tends to get thickerthere, as the market makers have a lot ofsiog buy and sell limit orders there from thepublic investars that they have to fill
‘So, we see 2 bit of consolidation before thedownwards march continues, we fire off ourshort right under 30, at 29 3/4 (with a coversiog al 30). We cover 1/2 the position at 29(trailing stop at 29 1/2) and the balance at 271/2, for another 2 1/4 points win.
 
Remember, you can add to and sell off yourpositions in pieces, a common pro tradingtechnique, eg short 400 at 29 3/4, cover 200at 29, wait and cover the remaining 200 at 271/2 Your trades do not need to be “all ornothing”, rather use dynamic position sizingdepending on the price action to get the bestoverall trade. This is how market makerstrade, you should try it out yourself as well
More Tips & Guidelines on How to Make Winning OPEN SHORT Trades:
Keep these pro techniques in mind for playing open shorts:Keep in mind the reason for the open short (why did they gap it up?). Be more cautiousabout shorting eamings plays than you are about shorting news-tyne plays
Always always keep tight stops on your shorts. Because of the effect of "short squeezes",eg shorts trying to cover in a panic if the price starts to go up, you need to be prepared tocover quickly. Never short without a DAT broker (dont daytrade wo @ DAT broker, for thatmatter). Cover with market buy orders (or SOES limit/SLD).
The higher the open gap is, the more likely it is to attract sellers, which makes for abetter short play. Dont short a stock that geps up 3-5%, for example (we look to play thseon the long side, ff they make a new 2-day high or are making a cup pattern). Watch your“daily % gainers" list and look to short stocks that are trading over 400K volume or so thathave gapped up over 15-30%. Ifa stock hes gepped up over 50% it will almost always attractsellers, so it's @ matter of “when not if* to short it, if shares are evailable to short. Check withyour broker ahead of time that moming to see if they have shares to short. If your brokerhas a lousy (small) list of stocks that are available to short, switch brokers.
Use Level Il and Time & Sales to help time your entries for shorts mare than forlongs. We are still chart-pattem based trading using technical analyses, of course, butbecause of the uptick rule and the dynamics irwclved in shorting you should pay closerattention to level 2 support/resistance for shorts than for longs. The t&s is moreimportant of course, that's your navigation for the trade (the “tradewinds”)
Use Fibonacci retrace ments to help you identify your targets for where you shouldcover your open short trades. In the GALT exarnple above, we don't expect more than 36,out of the trade since that's near a fibo line. Your open gaps up will almost never close theentire gap, | look to get out at 1/3 to 1/2 of the retracement range.
Mogte Shorting Skils for Active racers: ¢rmnous NoarmFive
Back toTime of day pattems for best short selling: finding the best trading MODULE 5opportunities& Main Pointss© Becoming successful at timing your trades is * Your primary goal by the time you complete this lesson isImportant to your success to he able to a) anticipate time of day pattems that yield© Inthis lesson, we will look at some of the profitable short trades b) be able to recognize these tirne-time of day patterns that you should be aware kased pivots and reversals when they occur and c) be ableof to short stocks effectively. to execute short trades more successfully as a result of
row "knowing what te look for" in your short trades.Remember that timing takes much practice, and is bathdificult to learn and time-consuming to practice. This iswhy market-watching a core bastket of 5-6 key stocks forweeks, months on end, during at least the first 2 hours ofeach trading day, is so critical to your development as atraderAs a new trader, | used to enter trades late, still locking forgood movernent after the first, ost powerful rcve, hadday pivots as they occut in the market each been made. In time, | leamed to jump on the first moveday. more consistently and accurately. This tekes a lot of timee to develop; the more 1-minute charts you watch, the betterIn time, you will hopefully become more you should get at this crucial trading skill.am a 2 Cg egret eee Each trading day is a mini-werld in itself, you need to notmany poteland| become] better ate} to) apply blanket rules or your expectations to any one day,navigate the directional changes as they rather, you need to be flexible and trade “what the marketCoG is telling you" for each separete session.
By geining familierity with the time-ofdaypatterns that set themselves up for good shortopportunities, you can becorne rnore effectivein “timing your trades" to be in sync with theprofessional money flow.
Remember to keep an eye on the broadmarket indicators as always, an eye on theNasdaq TRIN, the COMPG, and your sectorcharts, to confirm the teversals and time-of* Paper trading, of trading 1UU-share trades, tor @ Lot's take a look at some of the timing pattems Ivemany months, is a great way to learn the discovered that help uncover what should become
intricacies of trading without exposing your consistent, profitable trading opporturitiescapital to much risk This 1s 2 good way to
leam shorting, by paper shorting at least 6months initially before doing live trades
Time of Day Patterns for Shorting Nasdaq Stocks
Here's a brief summary, we will illustrate all of these with racent chart patterns, from Feo 2001, below:
EARLY PLAYS: We've already discussed the "short an open gap up" when there's a bear cup reversal that you can seepremarket. The other early play is a bear cup reversal occurring after the open...
LUNCH PLAYS: Market makers often take a lunch break (hey, they're only human too, contrary to popular perception :)And stocks oflen drift down from 11:30 til 12:45 or so. Leisurely shorts can often be entered in this time frame as well
LATE SESSION PLAYS: Although I rarely or never play the aftemoon session, you can lock for short opportunities late
in the trading day on days where a) the compq is making new 2-day lows after 2pm or b) the market has run upconsiderably until 3pm, and profit-taking is happening
Bear Cup Breakdowns on the Open:
In shorting bear cups right after 9:30, as with open gaps up, you look for an arch, eg the stock gets buyers onthe open at 9.30, goes up to meet resistance, and sterts to fall. The key is, you don guess al the lop, you waittil it makes a new low of the day, and short under the breakdown.
These are best ifthey are rnaking a new 2-day low as well (in this exarnple, let's say ORCL traded 30-31 1/2 onthe previous day. . today, it opened at 29 2/4 on the open, traded to 30 decade resistance, then sold off again,the shart is at 29 5/8.
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par Cup (looks like an arch)
          
 
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Patterns for 10am Shorts:Sometimes a stock will choparound til around 10am, atwhich time il makes abreakout to the downside (orupside).
For shorts, we can look to1Qam as a good time; oftenthe traders in a stock willdecide whether to bid it up orsell it off at around 10am.
This ig a good time to look forshort entries, at right before10am, to prepare to short abreakdown
As you can see from thisexample, the stock broke dewnearly at 9°50 or so, then got a{0am bounce, before continuingdown
This illustrates the need toalways keep light stop losses,eg ifwe short at 29 5/8 or so,and it drops to 29 3/4 then starts:to bounce, we cover soon with asmall 1/2 point profit or so, wedon't wait for the stock to goback up to our onginal shortentry point
In the current market, tradingwins over 5/8 point on $20-§60stocks are fine to take, they arethe "base hits" that are ourbread and butter. . of course thehare run +1 1/4 type trades aregreat 10 get as well.
         
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