Trading On Tilt: The Warning Signs To Watch For.

Today’s guest post is by Tom Morton.  Tom started his career at the Chicago Mercantile Exchange in 1996, working in the Eurodollar futures pit, then moving to the Nasdaq 100 pit in 1998. In 1999, Tom left the floor and began building a successful career trading individual equities.  He is the co-founder of The Equities Room.

Trading on Tilt is something that just about every successful trader goes through from time to time.  It’s basically a disruption of the normal discipline and trading style that had helped a trader find success, causing him to make irrational decisions.

For me, I think it is important to understand how and why tilt happens so that I can help prevent and/or limit the damage it can cause the next time it rears its ugly head, which is part of the process of becoming a better trader.

With that in mind, let me illustrate one of my first experiences in trading on tilt, which I lovingly call….

“The After Hours Fade Trade Gone Bad”

For a bit of background, I had been trading for a number of years, made it through the dot-com crash and had started putting up some pretty consistent numbers month over month and year over year. I was confident in my own style and ability as a day trader, and I had been coming off an especially good run of late.

I had no qualms about trading after hours earnings reports, as I usually kept my share size small and was able to capitalize on the wide spreads and overreactions in stocks that had released earnings reports.

One day, I happened to see that $CREE had come out with an earnings report that read, (I’m sort of paraphrasing here, but this is how I remember it), ” in-line EPS and Revs for the current quarter and guiding lower for the next quarter by a few cents.”  I thought nothing of it, as it didn’t seem like a big enough beat or miss to get me involved in an after hours trade.

A few minutes later, my friend who was sitting next to me pointed out that it was trading a couple bucks lower…now down almost 15% or so.   It seemed like an overreaction to a somewhat modest miss so I decided to bid some, a relatively small amount, due to the fact that it was a knife catch play and that we were in the thinly traded after hours session.

Immediately the trade was a loser, and the stock dropped another buck or so…and it did so with one single offer that kept refreshing and dropping his price.  This is where my thought process on the trade first changed.  My original little bottom picking scalp trade was now turning into a battle against this single seller.

“Once this offer leaves,” I thought,  “this should get a relief bounce…especially since its now down over 20%.  Time to buy more.”  I did, and wouldn’t you know, the annoying offer left and I thought I was in the clear.  The stock immediately jumped back up a bit, and had I been offering out, I may have been able to come close to breaking even.

Honestly, I can’t remember if I didn’t exit the trade there because I was being greedy, or if it was because it happened quickly and I couldn’t get my offers out fast enough.  Either way, the window of opportunity closed quickly and I didn’t get out, and that awful seller was back taking everything on the offer and dropping the price again to new lows.

Now, with a pretty big position on, and my P/L getting uncomfortable (nothing disastrous yet..but about equal to what a pretty bad day would be), I had a decision to make.

As you might have guessed, I made the wrong decision, and kept adding to the trade.   Pretty soon, I was numb.  I was trading a position size that I never would be in during the regular trading day, let alone the after hours session.

I began to justify what I was doing in all sorts of ways.   First, my goal was to break even, then it was to get back ½ of my losses…by the end, I just wanted to see ONE STUPID UPTICK!  The stock was now down 35+%, without hardly any sort of relief bounce!!!   Unfortunately for me, it never bounced that afternoon and by about 6:00 that night, I finally dumped the position.

It was a killer loss for me.  In one after hours session I had lost more than I ever had on a single trade or in a single day and had wiped out a month’s worth of gains.  What started out as an innocent fade trade for a quick scalp had turned into my worst trade ever.

What I know now about my own trading psychology is that this scenario had all of the characteristics that are common in my trips into the “Tilt Zone.”

  • First, I had been coming off a good run and was likely trading a little bit too confidently.
  • Second, I scrapped my original trade plan and I tried to “out-think” the trade.
  • Third, I ignored the chance to cut the trade when there was still a chance to limit the damage.
  • Finally, the shock of the losses on my screen teased me into trading angrily and out of my comfort zone, trying to make up losses by adding bigger position size.   It was a snowball effect of poor decision-making.

If I have learned anything in my years in this business, it’s that you need to be honest with and about yourself in order to have success.   Though this was the first time I went on Tilt, it wasn’t the last time, but I do my best never to forget it, treating it like a scar, in order to remind me of some of my potential failings as a trader.  By acknowledging and improving on those failings I have become that much better of a trader.

Follow Tom and The Equities Room On StockTwits.

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(Note: If you are new to my blog, I post about all sorts of things.  Sometimes it involves something extremely personal, like creating a 30K baby or my Monster Trades.  Other times it deals with hot ex-porn stars who trade stocks.  And sometimes it’s about how to avoid “suicide”.  But a good place to start is The Best of bclund.  If you like what you read, please tell a friend.  If you don’t, please tell two friends.)

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

The Trading Setup For Those That Never Sleep

There used to be a pretty cool glossy mag called Trader Monthly, whose focus was to cover the “trading lifestyle.”  They started in 2004 but like many other things were a casualty of the 2008 market crash.

I was cleaning out a few old issues today and came across this quick hit showing a trading set up in the bedroom.  It’s pretty cool but you could probably find better things to do in the bedroom (I am sure his wife would agree).

The Internet Remnants of Trader Monthly

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(Note: If you are new to my blog, I post about all sorts of things.  Sometimes it involves something extremely personal, like creating a 30K baby or my Monster Trades.  Other times it deals with hot ex-porn stars who trade stocks.  And sometimes it’s about how to avoid “suicide”.  But a good place to start is The Best of bclund.  If you like what you read, please tell a friend.  If you don’t, please tell two friends.)

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

10 Tips If You Are Losing Money In This Market.

There is really no such thing as an “easy” market to make money in, however some types of markets are more conducive to success than others, and right now we are in the middle of one those types of markets.

If you are not making money in the market right now, you need to seriously re-evaluate your trading (and conversely, if you are making money hand over fist right now, you need to make sure it is because of your trading, not because everything is just going up).

So if your trading P/L is currently bleeding red, here are ten tips that might help put it back in the black.

1.  Cut your position size – Everybody goes through losing streaks, and if you are in one right now you should be progressively cutting your position size down until you return to your winning ways.  This ensures that you are trading the smallest size during your worst periods. Think of it like an out of control night in Vegas; as it gets later in the evening you should be drinking less, not reaching for the beer-bong.

2.  Stop trying to short stocks –  No matter what type of market we are in, short selling is probably the hardest thing for a trader to do profitably on a consistent basis. Those that can are part of a very small and specialized group of traders.  It may seem “cool” to try to make your money selling short, but what is really cool is just making money. Besides every time you short a stock, somewhere a kitten dies.

3.  Trade less (make more) – Take it easy Racer X, you don’t have to be going full bore all the time, (besides you’ll never catch the Mach 5 anyway).  There is no law that says you have to trade every day of the week.  If you are consistently losing money right now, trading more often will just increase your rate of loss.  Dial it back a bit and take that extra time to review your charts and find optimal set ups.  Then maybe Trixie will finally pay attention to you.

4.  Stay out of low-priced stocks – Trading cheap stocks may seem tempting, especially if you have a smaller sized account, but these types of stocks are often illiquid with wide spreads relative to their price.  Not unlike short selling this is a very specialized trading niche, and right now there is no lack of well capitalized and liquid stocks making nice moves in this market.

5.  Pay attention to what the market is telling you - If out of the blue your wife starts going to the gym, getting “elective” procedures, and wearing high heel boots to “work,” you better pay attention or know a good divorce lawyer.  Each time the market takes a nosedive I see the streams come alive with traders closing out their longs, or going short. But that is not what the market has been telling you.  It has been telling you that this is a “buy on the dip” market, where you add to your longs on support and you certainly don’t short there.  At some point this will change, but until then don’t try to go against the grain.

6.  Trade in the best sectors – The overall market tone is the most important factor in moving individual stocks, and right behind that is sector performance.  If you are not trading stocks in the sectors that are moving with the market, you are putting yourself at a great disadvantage.  Just look at the coal stocks during this recent rally; they have been nothing but dogs.  Make sure that you are trading stocks in the sectors that are moving up with the broader market.

7.  Check your methodology – Or more importantly, make sure you have a methodology.

8.  Review your risk/reward ratios – Are you averaging larger losses on your losing trades that profits on your winning ones?  If so you need to adjust your risk/reward parameters when entering a trade.  The minimum you should strive for is a 1:3 ratio, which means you can “win” on a smaller number of trades and still be profitable.  For more info take a look at my “Deconstructing A Trade” videos where I cover that subject so often you will want to puke….but in a good way.

9.  Eliminate external distractions – One day in 2005 I was battling a bad market, a bad Wi-Fi connection, and was forcing bad trades.  Even worse than that, my wife kept bugging me every three minutes or so. “Honey, can you come over here?”  “Yeah, yeah, just give me a minute,” I would say. Finally she said, “honey, I think the baby is coming!”  Out of deference to her, and the doctor, and the nurse, and the intern staring at me, I closed my laptop and stopped trading for the day.  (Oh man, I wish I was kidding about this story). Point is, if there are distractions in your personal or professional life, they can often cause you to lose focus in your trading.  If you can’t eliminate them, it might be best to hold off on trading until you can get a handle on them.

10.  Subscribe to a trading service – As I have written about in the past, I am a big fan of quality subscription services.  If you are a beginning trader it is like having an experienced mentor, and if you are a seasoned trader, it is like having an extra pair of eyes on the market. The money you make in trading spends the same way no matter if you found the trade yourself, or somebody else gave you a heads up on it, so put your ego aside and make good use of this “tool.”

And of course most importantly, finding an interesting and informative free blog that talks about the relationships between the markets and life, in a humorous and relatable way, will take your mind off your trading losses and let you relax.  Just make sure you can subscribe via E-mail or RSS.

Make sure to check out my new book  Trading:The Best Of The Best-Top Trading Tips For Our Times  (just click the banner below).

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Why not subscribe to bclund.com for free  Via E-mail or Via RSS and follow me on StockTwits and Twitter?

What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in). Check out “The Best Of bclund” to get started.

Click here to “Like” the bclund Facebook page.

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

Deconstructing A Trade: Changing Time Frames.

(When video starts enlarge to watch in HD)

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(Note: If you are new to my blog, I post about all sorts of things.  Sometimes it involves something extremely personal, like creating a 30K baby or my Monster Trades.  Other times it deals with hot ex-porn stars who trade stocks.  And sometimes it’s about how to avoid “suicide”.  But a good place to start is The Best of bclund.  If you like what you read, please tell a friend.  If you don’t, please tell two friends.)

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

Deconstructing A Trade: Slow And Steady Is Still Profitable.

(Enlarge when the video starts to watch in HD)

Subscribe to bclund.com Via E-mail or Via RSS

(Note: If you are new to my blog, I post about all sorts of things.  Sometimes it involves something extremely personal, like creating a 30K baby or my Monster Trades.  Other times it deals with hot ex-porn stars who trade stocks.  And sometimes it’s about how to avoid “suicide”.  But a good place to start is The Best of bclund.  If you like what you read, please tell a friend.  If you don’t, please tell two friends.)

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

You Had Me At “Space”…And At “Playboy”…And At “Gentleman’s Club.”

One of the coolest things for me as a kid was going to Disneyland and visiting Tomorrowland.  It was a fascinating place that stylistically made me simultaneously think of both the future and the past.  Like, the rocket ships were going to go Mars, but the cabins in the ships looked like 50′s style “modern” lounges, the type you would see illustrated in the pages of your father’s old Playboys.

Imagine my (theoretical) thrill then when I read that Playboy is entertaining the thought of a gentleman’s club in space; dovetailing off of Virgin Galactic’s plans to launch their own space tourism flights this summer.  A Playboy representative elaborates….

As Virgin Galactic gets closer to becoming the world’s first commercial space line, Playboy is eagerly pondering the creation of the ultimate intergalactic entertainment destination. This heaven-in-the-heavens will exceed starry-eyed travelers’ wildest dreams, and guests will truly experience a party that’s out of this world.

Alas my days of going to gentleman’s clubs are long gone as far as you know, but even if Playboy’s plans are more “theoretical” than realistic, the idea of getting a lap dance in zero gravity does cause the mind to wander.  Perhaps I can convince my wife to let me go just so I can check out the futuristic architecture and design styling……

Below are some artist’s renditions of this “stellar space strip-club” (hey…not bad, huh)?

The Exterior:

The Restaurant:

The Club:

The Hotel Suite:

The Game Room:

Playboy Ponders The First Gentleman’s Club In Space (Via i09)

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(Note: If you are new to my blog, I post about all sorts of things.  Sometimes it involves something extremely personal, like creating a 30K baby or my Monster Trades.  Other times it deals with hot ex-porn stars who trade stocks.  And sometimes it’s about how to avoid “suicide”.  But a good place to start is The Best of bclund.  If you like what you read, please tell a friend.  If you don’t, please tell two friends.)

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

There Are Dorks Among Us – And They Are Fascinating.

Back in 1980 I was one of those kids that was addicted to arcade games.  The minute that school was over you could find me and about thirty other kids jammed around the Asteroids game near the front of the corner liquor store.  All I wanted to do was eat, drink, and sleep arcade games.  But as I got older, my life evolved in a normal manner and I moved on, as I figured everybody else did.

That is why I was so shocked to find out that there are still full-grown adults who compete in arcade gaming.  Let me be clear here, not computer gaming, but old school arcade gaming.  Think Defender, not Call of Duty.

I learned this when I stumbled across the documentary “King of Kong: A Fistful of Quarters”.  This documentary is ostensibly about the competition to achieve a new world record in Donkey Kong, but is really about intense competition, intrigue, fascinating characters, back stabbing, mind games, Machiavellian manipulation, failure, and ultimately, redemption.  It is simply fascinating.

Give it two minutes and I guarantee you will be hooked.

Subscribe to bclund.com Via E-mail or Via RSS

(Note: If you are new to my blog, I post about all sorts of things.  Sometimes it involves something extremely personal, like creating a 30K baby or my Monster Trades.  Other times it deals with hot ex-porn stars who trade stocks.  And sometimes it’s about how to avoid “suicide”.  But a good place to start is The Best of bclund.  If you like what you read, please tell a friend.  If you don’t, please tell two friends.)

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

How I Missed 400 Points In Apple (aka…In Life, Always Go For The Cubans).

I am not one of those hip people who gets waived past the velvet rope right into the club, and if I do get in, I am terrible at getting the bartender’s attention. I just stand at the bar and watch as people on both sides get their drink orders taken before me, while I try to figure out what I’m doing wrong.

My brother-in-law Dan is exactly the opposite.  It’s like his hand is permanently affixed with one of those stamps you can only see under an ultraviolet light.  He always knows the doorman. He used to date the waitress.  The bartender is his best friend.  He is the essence of bar cool.

A while back he came into town and in an attempt to show him how cool I could be, I took him to a great little cigar bar I know of in Los Angeles.  I had been there a few times before and had noticed that there was a humidor “behind the humidor” if you know what I mean.  If you don’t, I mean that there were real Cuban cigars in that second humidor, which although the best in the world, are illegal to sell in the United States (thanks a lot JFK).

I had worked up a good rapport with the bar owner and was pretty sure that I had become enough of a regular that I would soon be offered “The Cubans.”  I primed my brother-in-law, who had never smoked real Cubans before, and left him with the impression that we were “all dialed in.”

We arrived and took a seat at the bar, and the owner recognized me right away. This was a great start to the night and I felt that my “cool” quotient had already started to rise.

He asked us what we wanted to smoke and I told him that I wanted him to pick up out something “special,” while doing my best “wink wink, nudge nudge, say no more” routine.

“I know exactly what you are looking for,” he said, “I’ll be right back.”

He walked towards the humidor, and not wanting to look too anxious, I kept my back to him. I leaned forward towards Dan and whispered, “is he going to the humidor behind the humidor?”

“No,” he replied.

Dammit!

He came back with a couple of great cigars, but they weren’t Cubans.  I was not sure where to go at this point.  I thought I had given all the correct non-verbal cues; that the tone in my voice spelled it all out.  But my fantasy of finally being part of the “cool” crowd was fading away fast.

We smoked the cigars and drank our drinks, and Dan suggested we have another round of both.

This was it. This was where I was going to make my stand. All or nothing.  Home run or strikeout. Sydney or the bush.

I called the owner over, ordered two more drinks, and then told him “we want the real special cigars.  You know ‘los mejores’,” as if using my high school Spanish on him would seal the deal.  I probably looked like I was having an epileptic seizure as I simultaneously motioned with my head, trying to convey the universal signal for “you know, the humidor behind the humidor.”

“Ah ha.  Got it!  Back in a second,” he said.

“Is he going to the humidor behind the humidor?” I feebly asked my brother-in-law, the last bit of my hip quotient hanging on life support.

“No,” Dan replied.

I was crushed.  I did not get it.  I would never get it.  What did I need to do to get this to happen?

When he returned with two more non-Cuban cigars I thought there was no choice but to accept my fate and just smoke the ones he gave us.  As I was just about to reach for one of them, my brother-in-law leaned forward and said….

“We want the Cubans!”

We want the Cubans?  Did I hear that right?

I was shocked.  I was mortified.  You can’t just blatantly say something like that!  You need to be subtle. You need to be smooth. You need to be strategic and analyze the situation, waiting for the right time to….

“Oh…..!!!,” said the owner, “You want the Cubans?  Hold on I will be right back.”

I was 42 years old, and in that moment I instantly realized that I had spent a large part of my life in the “analysis” mode instead of the “action” mode.

Looking back, how bad had it been at times?

I’m nineteen years old and my best friend and I are going over to his girlfriend’s mother’s house. She is gone for the weekend, and his girlfriend has two of her friends spending the night.

Schwing…..!!!

I am told one of the girls, Vicki, is a model who has been in jail.

Double schwing……!!!!

We get to the house and start to party. Everybody is hanging out in back by the pool, drinking Corona’s, and getting loose.  After a while one of the girls says she is tired and is going to bed, followed quickly by my friend and his girlfriend.  That just leaves just me and Vicki.

Vicki wants to get in the hot tub, but “oh no,” neither one of us has brought a bathing suit.  “Let’s just skinny dip,” she suggests.  At this point I can actually hear the cheesy porn sound track start to play in my head….

“Bump chicka-bump buuuump bump ba, bump chicka-bump buuuuump bump ba…!!!”

In one seamless and fluid motion she strips her clothes off, grabs her beer, lights up a clove cigarette, and slinks down into the hot tub.

Now stay with me here.  I am sitting in a hot tub, naked, alone with “hot-model-ex-con-chick,” who is drinking a beer, and smoking a clove cigarette……

A CLOVE CIGARETTE FOR GOD’S SAKE…!!!

And in that moment, the thought running through my head was, “I’ve got to figure out the right time to try and kiss her.”

Last week I highlighted a blog post about $AAPL that I did in December of 2008, when it was trading around $85.00.

As I re-read that post for the first time in over four years It reminded me how much thought and detailed analysis I put into it, and how much in-action it led to.

And it just wasn’t when $AAPL was at $85.00.  I remember talking to my friend when it hit $170.00, saying that we should just drop some money into it and “put it into a drawer.”

The same thing happened again and again over the years in the 200′s, 300′s, and 400′s….each time I “analyzed” my way out of buying it.  Now that I think of it, I did the same thing with $BIDU when it was at $88.00…..pre-adjusted for the split.

AAAAARRRRRRGGGGHH……!!!!  These were my market versions of the hot tub and cigar bar.

We know that as market participants we have to do analysis (even if we don’t want to), and that we can’t just randomly “go for it” without using risk management.  But I let over-analysis get me so micro-focused that even though I could see the overall macro picture unfolding, I couldn’t act on it.

I am not saying that I would have held $AAPL from $85.00 straight up to the current low 500′s, but surely I could have taken some 50 or 100 point chunks out of it, instead of trying to day trade it for crumbs here and there.

This revelation is particularly painful given the fact that my friends and I used to joke in the late 90′s that someday our kids would ask us, “daddy, didn’t you have a computer in the 80′s, and didn’t it have Windows on it?”  We would then have to rationalize to them some contemporaneous excuses for not buying $MSFT.

Nobody can expect to catch and act on every opportunity that presents itself in life, but taking yourself out of the game before you even have a chance to play is just wrong.

I know someday I will have to answer the “didn’t you have an iPod back when…” question to my kids, just like I had to answer the “weren’t you in a hot tub with…..” question to my friend.

My goal though going forward in life, is to never have to ask myself the “why didn’t YOU go for the Cubans….” question again.

Make sure to check out my new book  Trading:The Best Of The Best-Top Trading Tips For Our Times  (just click the banner below).

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Why not subscribe to bclund.com for free  Via E-mail or Via RSS and follow me on StockTwits and Twitter?

What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in). Check out “The Best Of bclund” to get started.

Click here to “Like” the bclund Facebook page.

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

Hey New Yorkers, Do Yourself A Favor….

As I have mentioned in the past, I am not a fan of Los Angeles.  I have to be there during the week for work, but it almost takes an Act of Congress to get me up there on the weekend. However last Saturday I made the trek from “The OC” up to LA in order to attend Joe Fahmy’s Trading Big Winners seminar, and I have to say, it was well worth the trip.

Those of you who have played sports may be familiar with the phrase “leave it all out on the field.”  It means that when you are done playing, you have nothing left to give because you gave your all; and that is what Joe did, he gave us everything he had in that seminar.

For over 9.5 hours Joe explained in detail his methodology for finding and trading these winners, including going through tons of charts, step-by-step, and answering all questions.

It was a great day.  I got to meet a number of traders including StockTwits own @ivanhoff (who reviewed the day in his “7 Things I Learned from Joe Fahmy’s Trading Big Winners Seminar”),  and I can highly recommend it to anybody that is thinking about attending his New York City seminar on March 3rd.

Do yourself a favor and check it out!

Joe Fahmy’s Trading Big Winners Seminar In New York City.

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(Note: If you are new to my blog, I post about all sorts of things.  Sometimes it involves something extremely personal, like creating a 30K baby or my Monster Trades.  Other times it deals with hot ex-porn stars who trade stocks.  And sometimes it’s about how to avoid “suicide”.  But a good place to start is The Best of bclund.  If you like what you read, please tell a friend.  If you don’t, please tell two friends.)

Brilliant stuff like this rains down like..well, rain, on my stream during the week. If you want to get wet, follow me on Twitter and StockTwits. You can also pick up my book Trading – The Best of the Best: Top Trading Tips For Our Times by clicking here.

Come On, You Know You Want To: How To Short Stocks.

Today’s guest post is by Henry Brookins.  Henry is a former hedge fund manager with 18 years of trading experience.  He is a graduate of the US Naval Academy and holds a dual Masters of Science degree in Meteorology and Physical Oceanography.  He is the founder of Stocklooker.

Shorting stocks is a higher risk game right now, especially when you consider that the Government and Federal Reserve (private bankers) are trying to prop the stock markets up during this election year.  So right off the bat, the odds are against you if you are shorting in the near-term.

Additionally, from a historical perspective, the stock market has trended higher for over 200 years, and the average period of a Bull Market is 3.5 years while the average length of a Bear Market is 1.5 years. Again, on a longer-term basis, the odds are against you if you are shorting.

Furthermore, when you short a stock, because a stock price can go to infinity, you can lose all of your money. But if you short a stock and it falls and you are making money, the amount you make is finite, or limited, because when the stock price goes to $0 that’s it….

Finally, the Government and Securities and Exchange Commission (SEC) can change the rules of the stock market with a stroke of the pen.

In 2008, the markets were falling and the SEC ruled against short selling financial institutions and other significant companies….so you can be making money “shorting” and overnight have your butt handed to you because the “Powers That Be” decided you are un-American by making profit off of the “misfortunes” of others.  (By the way, Investment Banks were allowed to short all stocks – because they own the rule makers).

And  have you ever heard of the SEC halting “buying a stock” because it was going up too fast? Nope. Again, the field of buying long and selling short is tilted in favor of buying long.

SHORT SELLERS BEWARE…!!!

That being said, when I am going to short a stock, this is what I look for:

  1. The overall stock market is overbought, in a trading range, or trending down, not breaking out or oversold, and
  2. The stock I am shorting–its industry is in a downtrend, and
  3. The stock I am shorting has entered a downtrend itself.

What time frame am I talking about for each? It doesn’t matter, just make sure if you are a short-term trader that the short-term trends are down, and if you are longer-term the longer-term trends are down (determining trends is another topic).

I look for certain chart patterns (and these apply on any timeframe). I want to see the stock first move in a “false” direction, breaking out to the upside, then reverse and hit a new low for the day, then when it tries to bounce back and rally towards that daily high, I enter the short position as it approached that high and place a stop from .01 to .20 cents above that day’s high price.

The first example is $AAPL

The next example is $NFLX

Right now as the DOW is hitting multi-year highs the idea of short selling may be the last thing on a traders mind.  That is especially true these days when you can “buy long” an Exchange Traded Fund (ETF) that shorts an industry or market – and thus you don’t ever have to learn shorting techniques. There are advantages and disadvantages to buying short-side ETF’s, but that’s also a topic for another day.

Short selling is one of the hardest things to do in trading and no matter how you try to quantify it, it still is more of an art than a science.  With that said, in times of a down-trending stock or market, it is nice to have this tool in your arsenal and be able to make money with it instead of sitting in a losing long position or in cash.

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