Short Selling Isn’t Dead, You’re Just Doing It Wrong

By knowing our maximum loss, we create positive asymmetry on every trade.

Rule #2: Charts over fundamentals

The best short trades execute without emotions or ego. We don’t want a Bill Ackman Herbalife situation.

Technical (chart) patterns are an easy way to eradicate emotion from the decision-making process. Such patterns rely on price, and the price has no feeling.

The trade-off of a price-first approach is that you can get stopped out with your thesis intact. Given a choice, we’d prefer to exit with a slight loss and our capital than be right and get margin called.

Combining technicals with deteriorating fundamentals enables an investor to have greater confidence in the shorts they take. A beautiful setup happens when a stock with deteriorating fundamentals shows signs of a weakening price chart.

Rule #3: Boring over obvious

As we mentioned above, obvious shorts rarely work.

Short bond-like businesses instead. Such stocks sport lower volatility and less headache. You won’t make a killing in a few days, but you’ll protect yourself from violent gap-ups.

Short the stocks you won’t see on WallStreetBets.

It’s Possible To Improve Your Shorting Results

Two factors create a winning trading strategy:

  • Making more on your winners than you lose on the losers
  • Generating a high enough win rate to cover the losing trades

Remember, there are old short-sellers, and there are bold short-sellers. But there are no old, bold short-sellers.

Not everyone has a short mandate, and this essay won’t apply to them. But some firms must short stocks in their portfolio.

Remember the three rules:

  • Proper risk management to create positive asymmetry
  • Charts/technicals over fundamentals
  • Boring over obvious

Don’t make shorting harder than it has to be.

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Disclaimer: All statements are solely opinions and are for educational purposes only.

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