Thoughts on Shorts

The question of ‘shorting’ the market (profiting when it falls) is one constantly raised by our members; and certainly our trading methods are designed to seek profits in both rising and falling markets.

However, we provide some comments here about how trading from the ‘short’ side varies from trading the ‘long’ side.

Shorting stocks, index futures, etc... in a highly volatile environment is very different from that of the long side. Short selling is more a game of ‘short and cover’, ‘short and cover’ while the long side is better suited to giving a position time to run. There are many more buy side institutions than there is money deployed on the short side and, corporations own the means to production. We live in a world where the natural bias is to the long side.

We find using a protective stop by setting a target for the 1st profit target, with an eye toward letting the second piece run, is well suited. However, the market remains so choppy that it is tempting to ring the cash register as gains can disappear easily. Naturally, when one does – the market tends to trend.

Given the fact that we remain entrenched in a bear market that began nearly 12 years ago - opening pop ups on stocks and indices are opportunities to sell into strength.

Discipline wins over intuition, while you can’t beat yourself up over taking a profit, letting outsized gains off the hook is tough. The big fish make up for a lot of small mistakes which are a natural part of the game of risk.