How to short sell effectively?
Short selling is the trading style where a trader sells securities without owning them. Typically when we short sell, we actually borrow these stocks from our respective brokers and sell it to the buyers, of course it makes us liable to buy those stock back at some point in future, either at lower price, causing profit to the short sellers, or at higher price, causing loss!
Let us discuss today how and when a short sell strategy can be applied successfully!
Since by short selling, one can make profit only if price goes down below the selling price, so it is imperative that we select down trending stocks only for short selling. This can be done by following a stock over a couple of days.
If a stock is making lower low constantly, there will be a very much chance that this very stock is in established down trend.
Simultaneously, one should avoid the stocks which are constantly making higher lows, since it will be in strong up trend and a short selling more likely, will result in a loss.
Once this way we find a stock, we need to find the profitable shorting level. Since the stock we selected is breaking its lower price every day, so breaking previous day’s low price would ensure that the stock is still in down trend. Hence, it will be the most confirmed short position.
Once this entry level is established, we need to define our stop loss, this we should define as per our risk taking capacity and this varies person to person. But one thing is for sure, we do need a stop loss in place, in order to save ourselves from potential bigger loss.
Now we have a entry point as well as a stop loss in place, we need to find a target, unfortunately, no one can predict about potential target, so it is good idea to keep trailing stop loss, i.e, we should increase the initial stop loss in direction of trade as we see profit.
So this way, without any kind of serious technical analysis, we can find potential short sell candidates and find a trade, needless to say, a person , who is proficient in technical analysis , is likely to find short selling candidates more precisely, but this method should work for our average traders /investors
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