Candlestick Trading Blog

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Sometimes Selling Yourself Short is a Good Thing!
We really dug deep into creativity bin for today’s title. But in the stock market, sometimes selling yourself short really IS a good thing! Selling short is an advanced trading technique that is an about-face to the typical goal of most investors. When you are selling short you don’t want to find the best stock to buy, instead you want the stocks that are falling! Short sellers (which has nothing to do with little people) don’t look for good stocks to buy; they look for good stocks to sell.

Selling short involves selling stock you don’t own, believing it will fall in price in the near future. When the price drops, you can buy the stock at the lower price, pocket the profit and return the shares to the original owner. This definitely sounds like successful trading, doesn’t it?

Here’s an example. Your stock technical analysis and candlestick charting on Acme Tea suggest that the company is poised to fall. Using your Internet stock trading account, you sell a short on 500 shares of Acme Tea. Since this is actually a credit purchase, you are required to have a margin account, which you do. When the stock is on an “up tick” (stock market talk for a rise in stock price) your purchase is made. The money is escrowed to protect the original owner.

Let’s put some flesh to the bones of this example. You are very bearish on Acme Tea, so you sell short 500 shares. The current price is $25 per share, so your account is credited $12,500 for the transaction. In no time, your faith in your Japanese Candlestick stock trading system pays big dividends; the price of Acme Tea has bottomed out at $15 per share. You sell 500 shares at $15 per share (a total purchase of $7,500), cover your position out of the original $12,500 and pocket the remaining $5,000. Remember that this example ignores the fact that you will owe commissions on your transactions; you just made $5,000 so I think you can cover it!

Are there any risks? There are definitely risks involved with selling short. In the previous example, if the Acme Tea stock suddenly rose to $35 per share instead of falling, you would be required to cover the difference of $10 per share, or $5,000. If you don’t perform your Candlestick chart analysis or if a bull market pulls the stock up, your loss is the difference between the stock price and your short. Needless to say, this could be a lot of money.

As you know, it is impossible to perfectly predict when, or if, a stock will rise or fall. It is possible to identify trends to use in conjunction with your fundamental and technical analysis of a company to get a strong idea. A strong stock trading plan, analysis matrices such as short interest ratio and due diligence with your research will take you far to being able to predict the movement of your stocks. Once you’ve done your homework, don’t be afraid to sell yourself short. If done correctly, it can reap great benefits!