Making Money in a Down Market

Many traders and investors shun the idea of short trading. There are several reasons they point to in order to justify not taking advantage of this potentially profitable technique. The first reason is “the market has an upside bias.â€‌ This is true, however, that’s a long term bias. Traders concentrate on the short term. Every stock moves through cycles. Its inevitable that they will undergo within these limitations, shorting provides ample opportunity to profit when the market begins to corrections and downturns. In fact, the market falls approximately one third of the time. If you’re not taking advantage of it, you are foregoing one third of your opportunity not only for profits, but fast profits. When stock prices fall, they tend to do so much faster than they rise. This is because the fear and panic will drive traders to sell quickly, causing the price to take a rapid dive.

Another reason that traders give for not short selling is that they feel it is capitalizing on another’s loss. In response to that, I’d like to point out that traders who sell short eventually cover. This in turn will result in an increase in stock’s price.

The strict Bull trader will also point out that short selling opens up an unlimited potential for loss. In reality, this is true, if you’ve taken leave of your senses enough to let any position fall that far against you. To limit your losses when shorting a position, place tight stop losses and adhere to them just as you would when entering a position long.

There are, however, some differences in shorting that you should be made aware. The number of stocks made available for short selling is smaller than that in which a trader may go long. The number available will usually depend on the size of the broker. In addition, you can’t short a stock on a downtick. This prevents massive sell offs of a plummeting stock.

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