This will come across as rather an over-simplistic post, but it is of great benefit to traders who are considering shorting this market now or in the future, or to those who are apprehensive at the notion of such an idea. What I want to do is break it down in its most simplistic form, and give you the three elements that I abide by and always keep fresh in my mind.
Now remember too, there is more risks that come with shorting stocks, in that a company could be bought out suddenly, and cause you to cover (i.e. buy the stock back at a premium) at a much higher price or you can stand to lose a lot more than the amount you're shorting (i.e. news about a drug approval in a biotech stock that sends the price from $5 to $15 overnight – that's right you'll have a 200% loss on your hands). But these kinds of events are very rare, and that is why, you do have to pick and choose your stocks that you short with those possibilities in the back of your mind.
But once you understand what I've just said, you need to keep in mind the following three points, and you should find trading to the short side just as easy and seamless as trading to the long-side.
Here's the breakdown….
1) Everything you know about trading long is the exact opposite in trading short: i.e. double tops are double bottoms, inverse head and shoulders are just plain ole' head and shoulders, cup and handle patterns are inverse cup and handles, and of course breakout plays become breakdown plays.
2) Stocks take the elevator down and the stairs back up – that means you're gains are going to be faster, and you'll have to book your gains faster as well. Long-term Short-and-hold doesn't really exist.
3) When you short, you are going against the Fed, Congress, D.C., Central Banks, International Organizations and other world powers. That means their interest is not aligned with yours, and they don't get re-elected off of you making a boat-load to the short-side and as a result, they will do whatever they can to keep the markets propped up, even at the expense of long-term economic longevity. So don't get married to short positions and take the gains on strength.
And that's it my friend. Some of you will disagree, but I'm simply here to provide you with what works for me. Some of you out there I know and have met, have brilliant ways of trading to the shortside, but what I want to do here is provide some basic understanding, so that you go into trading to the short-side with the right frame of mind.