s normal. Kyou take a large
stop, over 1/2 point, somathing’s wrong, and
you need to pause and evaluate why
If you teka a small stop, ag less than WE of
Much of what you find in the way of errors ara simplemistakes, eg not trading the chart patterns correctly.Other mistakes may be due to order routing errors, egtrying to chow via SNET when only ECNs are hidingAlso, you wart to use level 2 m your shorting, but again,nol as the primary decison making tool, Yourpatterns sre what you use in all trading, lavelhelp manage cover stops and order routing, that's itLearning how to use tine & sales effectively es also key togood trading, a3 it shows you the trade-by-trade sentimentin tha stock.
Being too slow is also 3 comman enough error that newtraders make, Daytrading is a fast garne, you need to honeyour reflexes for i, That's why | say shorting is forexperienced tradars anly, as you naed to get hoth shortinginto the uptick correct, a= well as your chart analysis andnek management,
Here's a few common errors and mistakes you want tocheck yourealf for prior to trading short
  
Avoiding Common Shorting Errors & Mistakes
Error #1 To Avoid:
 
Remember our basic tradingguidelines - you want to playoff extremes.
Buying gaps down, onconfirmation of buyers, is thenight play. I'm much more leeryof shorting a huge gap down,eg over 8-15% down on theopen, as it will often attractbuyers
So, you da not short an opencap down, that's as had as
to Observe the Technical Si2 Shorting an Open Gap Down
fac l|finewarchat —=]))P) [WC Ie=A| Safir | NOR
tuying an open gap up, for acap and trap
You need to look for cuppaitern reversals following agap, and play the tradeaccording to the major trendfor that day, since the stockopened.
In our live trading room, wenailed this one long over 36 3/8for good profits. (acompetitor's room had theirtraders take a J point losstelling their traders to short thegap down),
Professionals trade early, withthe trend, on confirmationsignals, a5 | teach you to do
Volume
 
 
 
 
 
1Peta 50ft nny agf we H, 48tt fy wel i 4 a7init glFi 464 45£ 4443New traders may think to-short open gaps down-on 42perceived weakness. This is almost always wrong, 1we-look to.buy open gaps.of >8-15%.on reversals. 40over whole numbers, if it gets a.cup_long pattern. \ 39Do not short open gaps down unless there is a 38continuation of the trend, under a whole number. 736Here's an example-of BRCD: we traded it long 353 times. in a row at TTO_after a large gap down. 34coppigh 2000 tas Brovaaing cadfVOUld not be a short unless it lost 34 suppart->1.50M1.00M| | | 500Kili ian vial ltt | l bi | ill i10:00 11:00 12:00 44:00 15:00 1000 14:00 12:00
 
2/21/01 2722001Error #2 To Avoid:Going Against the Primary TrendExample: Shorting a Momentum Runner
This is the same as trying to catch a bottom, afalling knife, without any reversal confirmations
New traders will say "It looks expensive here at 52,
fry ]\[inevachar =] Pl|v Qlol=it already ran up 2 points", only to see it go up fase] [lmeratcrat =] PIV AIS
another point and a haf, as in this GSPN example =
(hoa Layne J a
Don't-try ta guess tnas. | 39 4,2or short ‘because it
looks togpy', itean 32easily keep going.
4
 
 
Remember, we need technical signals far alltrades. Trying to ‘catch the top" of a momentumtunner is poor trading.
Good traders will wait for it to consolidate a bit,then lose a key support level, before firing aff ashort31172Do not guess where the top of a big runner is forshorting. Wait for a confirmation pattem on these tk i" 34ii we
And, these should only be attempted by very
experienced traders. Its much better to short a new 302-day low on the way down than it 1s to try and Copp, D9 NOT short a momentum runner unlessshort the top of a stock that's just ran up a lot Youn’ it makes a “bear cup reversal” off a top.
New traders get caught in these shortand the ‘squeeze’ causes short losses,
 
 
10:00 10:30 14:00 11:3021501 eee
Error #3 To Avoid:to Short a 2-day Breakdown3 Watching vs Shorting a 2-day low
 
osu SJ Jirtevaithat =] [PV Olea 4) fir) SG
Remember to not get ‘paralysis
 
 
analysis’ if you see a solid entry 39 412on a technical signal like this i 39one ual NI \ | 3842i 38The stock, JOSU, is making a i hy ant tH 37 4722-day low breakdown under 37. 18 FyWe short it at 36 58, and look ayto cover around 34 for a nice 36 12profit 36Don't failto enter ashortion 35 12Zday breakdowns Od good to our Best Short play, eg shorting 36short inte, generally speaking, at the:5i6-under-a whole number 34172eel ere eterna for a.stock making-a new aMand trade these powerful short igpattems when they are available 2-day low, 4) 332for you 47 33321123231172By]301123029 1122328 112| epriak 2000um Brenden Co.2.001.50M| | | om500K| hadi alist ual tin
 winning short trades
Qpen Short Example Types:
 
Short Daytrading Basket Trading Worksheet
Instructions: Scan for stocks each day, and weekly, that fall into each ofthe three categories below. Use this to improve your ability to execute
Stocks Meeting This Criteria:
aGoal: Be able to Scan and select stocks thatare good for intraday shorting
Papertrading Results for EachType: Your Net Profit(Loss
 
Stocks that Are MakingNew 2-day lows:
     
These are the best types of shorts:look to short stocks that are makingnew lows, Under the previous day'slow, after 3:45am or so. Short underwhole number resistance, eg at a4
 
 
Open Gap Up Shorts>15% wivolume >40K:
 
Slightly riskier, look to short stocksthat make a reverse cup pattern an anOpen gap up of over 15%, shortaround 9:40-10am.
Shorting the reverse side of|
amomentum runner:
 
These are generally not recommended, forvery experienced traders only, shart a stockthat is in a mini technical downtrend afterrunning up over 12-15% during the first hour‘of the trading day and is now reversing. Notethat is has to be making a lower low/lowerhigh pattem after making a top. Use close 1/4point stop cover loss max on these.
 
 
 
 
 
  
 
. Directions: Use this sheet to hela you identify the tye of short you would make, as wel! as timing forShort Trading Journal son trades, compared to when the actual hast (gnprxinate) times to shorteaver would Ae.Ticker Date Type of Short Time I would Actual Best Time Time | would Actual Best Time = P/L(2-day low, gap up...J), have Shorted it: to Short If? have Covered? to Cover?ALTR 11/23 making 2-day low 10:05 10:18 10:28 10:28 Cok) +3/4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
entry and exits fy conrectiyusingSupport and resistance keveis
Complete this worksheet to help you identify chart pattem support‘resistance levels for shorts.
7 7Finding Support and Resistance for Shorts J ee es
On the RNWK chart to your left, draw in the foilowing:1) Early morning consolidation area (circle it)
2) Support level in the morning (horizontal line)
3) Correct short entry
4) Correct short cover area
On the EXDS chart to your left, draw in the following:1) Early morning consolidation area (circle it)
2) Support level in the morning (horizontal line)
3) Correct short entry
4) Correct ist short cover area4) Second support area (horizontal line), and 2nd short
On the SUNW chart to your left, draw in the following:1) 2 day support and resistance areas (horiz. lines)
2) Correct short entry (intraday, horiz. line)
3) Correct short cover area (above ?-Jlay support)
 Putting it All Together: Your Shorting Trading Plan & Skillbuilding
 
Your Daytrading Short Game Plan: Short Risk/Trade Management Plan:
What stocks will you plan on locking for What stop losses will you use, Maximum, per trade (circle)?shorts in, on a regular basis (your "core
shorting basket")? + 1/8th- 1/4 point (close trading, scalping-style)
+ 1/4 point (two-spread cover stops); = 36 - 1/2 point (wider stops)Tickers: * 1/2 point or more (do NOT do this!) Keep all stops < 1/2max
 
How Many Shares Will you Short in each trade (circle) ?
 
+ 100 shares (best for new traders, and for learning)
= 200-300 shares (after you've got some practice and are doing >50%)+ 300-500 shares (average daytrading size, after you're doing well)
= >500 shares (for experienced, pro traders only)
 
What types of short trades do you thinkyou'll try to do, primarily? (circle)
+ Losing 2-day support (best) Which of these Shorting MISTAKES will you AVOID (circle) ?«Intraday range shorts (ok)
+ Shorting momentum tops (risky, for pros only) * Trying to quess tops and short momentum runners making new highs+ Other (only highly experienced traders should atternpt these types of shorts)
+ Shorting too many shares at first, over 300Arade, in your first 50 trades* Trying to short stocks that your broker doesnt have shart shares forNotes: + Shorting without clearly understanding the best Order Routing choicesfor you to cover with (I prefer ISLD and SOES limit orders)
 
 
 
1 i i Back toModule Shorting Skills for Active Trader: wenuiies
>> Module Five: Activity 1 -"Your First 10 Open Shorts"
This actmity will help you leat to correctly identify which stocks are good for open short plays.
Remember, apen shart means il’s a stock thal you enter @ short sell trade for from 9:30-9:45 cr so.
Use a link like this one to see the day's %gappers. Your "screen" should be for stacks that have gapped
up over 20.30% on premarket volume of 40K shares or more, and are statting to sell off on the open.
A.cover stop loss should be no more than 2-3 spreads up from your entry.
You can also look to short % gainers at around 10am or so, look for stocks with at least 500K volume
that are up over 20-30% on the day for these.
The other “screen” is for stocks that have gapped dawn 3.5% on the open and are making new 2-
day lows.
* You will scon learn that setting your stop losses and profitable exit targets is the Most Important partabout shorting, just as with any trade.
+ For this open short practice activity, | want you to keep track of your profits and losses on the 10trades so you can see how you'd de in a live trading situatation.
* Please note that | have a reason for setting the criteria | do - da not make exceptions on the rules (eq
do not consider an open short on thin volume, eq under 10K volume, to be significant) ... Try my
techniques with discipline and see how well they work for you.Stochastic reversals are also helpful poco Sf finewatrat =) PI[¥ &| See) A
in locking for timing open short
 
  
opportunities. ‘
PP nd 2344
Look at WCOM here, the 232234
stochastic peaked and reversed,along with WCOM's price theshort signal was when it lost 23...a cover right over 22.
22:12
hi, i 2244ata Fag e ieWS
2144
Copyright 2000 Lata Ereadeacting Corp.low Stocks (15)80.0%60.0%40.0%20.0%
The GOAL for this activity is for you to learn how to successfully IDENTIFY GOOD OPENSHORT trading opportunities, using current examples.
Directions - Papertrading 10 OPEN SHORT trades:1. Over the next 10 trading days, I want you to look for a total of 10 “open short" plays
that meet our criteria for practice trading. (you may find 2 on one day, 3 on another,none on another etc).
2. Paper-trade haw you would enter and exit these “open short" plays based on the guidelines that
we have presented here.3. Open shorts are typically entered around 9.25-9.45 and covered by 10am or 10. 15arn at the
latest. Remember the first 6Qminutes makes reversals every 10-15 minutes and you want to be
on the right side of these in both your long and short plays4. Your cover stop losses can never ever be higher than the opening price was at. In the WCOM
example above, thats at 24 1/4...Eg you enter the short at 23 3/4 and have a cover stop at 24 or
so...
5. Keep track of your open short profitiloss for the 10 trading days that you are papertracing
these open shorts on.
6. Most importantly, make a brief list of what went right for your profitable open shorts and what you
should have done differently for the ones that you lost on. What changes will you make in yourpersonal tracing style based on what you've learned?
Module Shorting Skills for Active Traders:
Five
Module Five: Activity 2 - "Making Shorts a Regular Part of
your Trading Activity"
e This activity will help you learn to gain confidence and familiarity with the whole idea of
Back toMODULE 5
shorting, and help structure several practice activities that should help you become more skilled at it
¢ The first thing to do, of course, is to heavily practice it, with a simulator, like the excellent
cybertrader.com simulators. If you have an account with them, you just use “derma logon” and stillpractice trading with live data. If you're not a customer, you can practice with practice data. Or, use
whatever simulator you feel comfortable with, just practice.« Let's look at how to get started on the path to shorting stocks.First, you must realize the rim F]\finterval Chat Ee] 8) [iy S| | Beale) 2A Tr
Yalue, the Benefits of shorting
 
stocks.39.00This RIMM chart is a great 38.90example. One of aur TTO traders 38.60told us about the long run, I had "us wait, and short it on the way 38.40fown, at 39.7, to cover for a nice 39.20+1 gain.38.00Ever miss a "run up" in a stocks? 37.80For experienced traders, you can 37.60short a pivot on the way down,like this RIMM trade, New traders, 37.40short weak stocks making 2-day 37.20lows. 37.00Second, you need to get familiar 36.80with the uptick rule, and look for 36.60short opportunities based on the 36.40chart pattern and time & sales.HW 36.20Finally, you need to practice, 36.00practice, practice, til shorting 35.80becomes second nature.Papertrade extensively. Copyright 2001 Data Broadeacting Corp. eadolumeIt's the “other half of the action" ‘120Kand you shouldn't miss out on it, 100Konce you've been successfully 80.0Ktrading lang for awhile. 60.0K7 / 40.0Kme WIth lll =. Mh lc
 
 
 
 
 
 
 
 
 
10:00 14:00 «12:00 13:00 14:00 15:00 4/2001
The GOAL for this activity is for you to gain CONFIDENCE and FAMILIARITY for shortingopportunities, using current examples.
Directions - Papertrading Shorts for 4 weeks during the first 2 hours of the market:
1.
2,
Over the next 20 trading days, | want you to decide on 4 stocks that you will follow and look forshorting opportunities in for the 10am til 11:30am (only) timeframe.
Next, practice shorting only stocks making new 2-day lows. These are the best opportunitiesfor new traders to focus in on. If you're more experienced at reading time & sales, you can trypivot shorts like the RIMM exarnple above.
Paper-trade how you would enter and exit these short trades. Make sure that you see an uptickin your L2 box prior to entering a specific practice short entry, since you must have an uptick toshort into.
Keep track of your practice short trades (how much did you profitistop out on) and thetotal profitiloss for the 20 trading days that you are papertrading these shorts on.
Finally, print out the charts of the winning shorts that were good for the most profit, and make abrief list of "what went right" for these shorts. Exarnples can include: weak market, COMPQmaking 2-day low, you shorted a weak stock in a weak sector that day, time of day was good fora short, stock was making a new 2-day low etc.
To gain confidence, practice until you are consistently making winning trades. Take severalmonths to do this, do not be impatient. Like all trading skills, this one takes time to master - Bestwishes!ModuleFive
Shorting Skills for Active Traders:
Click on each link for a new daytrading lesson. Be sure to Back tocomplete the trading worksheets and activities for each module DTU CAMPUS MAR
Click on each line for daytrading lessons from thelist below. An underlined link means the content isnow available. Note: click on your browser's“reload” button to make sure you see thelatest modules posted as they becomeavailable. Remember to set your screen resolutionto at least 1024x768 to enjoy DTU.
 
WE = Updated pages win last week.
DIU Module 5 Lessons.
¢ Introduction to Shorting - DTU's Short Selling "Rules to Live By”
« Understanding the differences between shorting and trading long:uptick rule & order routing
¢ Open Shorts: The easiest and best short play
« Time of day patterns for best short selling: finding the best tradingopportunities
+ Types of stocks to sell short: from low to high risk shorting
« Premarket indications for shorting opportunities: chart patterns,
news/earninas ;« Types of short plays: momentum shorts, morning top shorts,
lunch weakness shorts
« Avoiding dangerous shorting situations: staying away from "shortsqueezes”
e Shorting and Nasdaq Level II: What to look for in your Level || boxfor shorts
« TA for Shorting #1: Basic Short Chart Patterns - IdentifyingIntraday Sell Patterns
« TA for Shorting #2: More Chart Patterns for Shorting: Volatility andVolume Tracks
« TA for Shorting #3: Using Stochastic Reversals to identify shortopportunities
« Sector Shorting: Identifying Weak Stocks in Weak Sectors, Usinglead/follow stocks
« Using the Market Indexes: shorting based on sector indexes,$COMPQ and $TRINQ patterns
« Risk Management in Short Positions: Where to Cover for Profitand Where to Use Cover Stops
« Avoiding Common Shorting Errors and Mistakes
« The Mental Game of Shorting: 5 Steps to Become Comfortablewith the Whole Idea of Shorting
« Additional insights into Shorting Stocks using Nasdaq Level 2 andChart Patterns
 <> Click here for Powerpoint viewer programClick here for MSWord view progam (3.5Megs)
e Your Short Stock Trading Basketaa « Short Trading Journal
ae « Finding Support & Resistance for Shorts¢ Putting it All Together: Your Shorting Trade
Plan and Skillbuilding
« Your First 10 Open Shorts« Shorting the Lunch Weakness and Last2 Hours’ shorts2. Level Il and Chart Shorting Activitye Making Shorts a Regular Part of YourTrading Skills - NewsModule Shorting Skiils for Active Traders: s#PREMOUS NEXT ®
FiveBack toMODULE 5Introduction 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 ta think that “if 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 zero, 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 (210-41=169) or $16900. If youte not good about taking stops, then you shouldnt 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 scteensnaps 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 RNWK 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 betler 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