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Rules for Shorting

  
  Education
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Basic Rules for Shorting Stocks

1. Shorting Momentum names is dangerous: Unless you are Superman, never step in front of a speeding locomotive

2. Valuation alone is insufficient reason to get short a stock — History teaches us that cheap stocks can get cheaper, dear stocks can get more expensive

3. ALWAYS work with a pre-determined loss – either a physical or mental stop loss — Never leave yourself open to infinite losses

4. Fundamentals tell you WHY to short something, not WHEN to short it. ALWAYS have some technical confirmation before shorting. Make a short selling wish list, then WAIT for technical confirmation. (We use Money Flow, Short Term Trend lines, Institutional Ownership, Analyst Ratings).

5. It is tough to be a contrarian: During Bull and Bear cycles, the Crowd IS the market.

You have to figure out two things:
…a) When the crowd is wrong — Doug Kass calls it “Variant Perception”
…b) When the crowd starts to get an inkling they are wrong

At the turns — not the major trends — is where contrarians clean up.

6. Look for Over-owned, Over-loved stocks: 95% Institutional ownership, All buys or Strong Buys (no sells), and 700% gains over the past few years are reasons to put names on your short selling wish list.  (That is how my partner Kevin Lane found and shorted Enron and Tyco back in the 1990s).

7. Beware the “Crowded Short“– they tend to become targets of the squeeze!

8. You can use Options to either juice your short returns, or pre-define your risk capital (options)

Rules for Shorting

  
  Education
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When it comes to shorting, many people are in the dark. It is more challenging to be short, subject to squeezes; the return max out at 100% — versus unlimited upside for longs.

Over the years, I have put together some rules for shorting. These are pretty broad and general, but they have kept me out of trouble when

Basic Rules for Shorting Stocks
1. Shorting Momentum names is dangerous: Unless you are Superman, never step in front of a speeding locomotive
2. Valuation alone is insufficient reason to get short a stock — History teaches us that cheap stocks can get cheaper, dear stocks can get more expensive
3. ALWAYS work with a pre-determined loss – either a physical or mental stop loss — Never leave yourself open to infinite losses
4. Fundamentals tell you WHY to short something, not WHEN to short it. ALWAYS have some technical confirmation before shorting. Make a short selling wish list, then WAIT for technical confirmation. (We use Money Flow, Short Term Trend lines, Institutional Ownership, Analyst Ratings).
5. It is tough to be a contrarian: During Bull and Bear cycles, the Crowd IS the market.
You have to figure out two things:
…a) When the crowd is wrong — Doug Kass calls it “Variant Perception”
…b) When the crowd starts to get an inkling they are wrong
At the turns — not the major trends — is where contrarians clean up.
6. Look for Over-owned, Over-loved stocks: 95% Institutional ownership, All buys or Strong Buys (no sells), and 700% gains over the past few years are reasons to put names on your short selling wish list.  (That is how my partner Kevin Lane found and shorted Enron and Tyco back in the 1990s).
7. Beware the “Crowded Short“– they tend to become targets of the squeeze!
8. You can use Options to either juice your short returns, or pre-define your risk capital (options)

That is my short shorting list . . .

Market Thesis

  
  Education
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thesis-paperPurely academic, non applicable information. Writing them out helps me organize these assumptions into ideas. Hopefully you find some use for them.

1) Trading is like any other business, but not only in the conventional sense. The market is manipulated. The underlining principle behind this statement is that equities market is the same as any other market in the economy, whether it be technology or tube sock market – those with the biggest market cap control movement and direction.

2)While prices are moving in a current path identified by trend lines, heads of market are processing information and making preparations for the next shift. During the time traders see the trend forming and change their “bias” in accordance with the trend, heads of market have processed new information and are ready to take prices to a new level.

3)Technical analysis is a visual interpretation of how crowds behave in relation to price. It does not influence how prices will or should behave. When prices reach a certain level, the technical indicator at that level does not dictate how prices will react, rather, (more…)

Technical Confirmations Explained

  
  Education
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Confirmation is necessary to validate a break of important support and resistance levels such as price patterns, moving averages and trend lines. Technicians and traders define Confirmation in various ways. While market situations vary, below is a guideline of three forms of Confirmation:

  • Percentage Confirmation: Confirmation is present when there is a 3% or greater break of a support or resistance level. Volume attached to the break, while not necessary, lends confidence to the confirmation. The 3% rule is commonly used by long term traders and investors. Short term traders use a lesser requirement to complement trading objectives, keeping risk/reward in line.
  • Time Confirmation: If there are at least three closes above or below a resistance or support level, then confirmation exists. A close varies based on ones trading time frame. Again, volume attached to the break adds significance to the confirmation. (We always write Three Consecutive close +Weekly close must for major upmove or down move )
  • Heavy Volume Confirmation: Volume confirmation presents when there is a substantial surge in volume relative to recent volume, combined with one close above or below a resistance or support level.
  • Combination: If percentage and time confirmations fall short of the minimum requirement, yet are accompanied by substantial volume (e.g. 1.5% close above resistance with substantial volume), that could be accepted as confirmation.

Traders can use this guideline to develop their own requirements for confirmation as individual investment objectives and time frames vary.

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