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Shorting Stocks

Shorting stocks occurs when an investor borrows shares of a company and then sells those borrowed shares at the current market price. When selling short, the idea is to pay back the person that the investor borrowed from by repurchasing the stock. The hope is that the stock price will fall so that this can occur. Many investors and stock traders have a hard time with short selling because it is the complete opposite from what they are used to. The goal is to find the best stocks to sell instead of to find the best stocks to buy.

When shorting stocks your stock broker will have some requirements of you. The most important is that you have to have a margin account. This means that you meet their minimum deposit requirements and credit requirements. When placing trades for you, the broker can only make a short sale on an “up tick.” This “up tick” means that the stock of interest must be increasing in value. The reason that this is a requirement is because without it short sellers would pounce on the declining stock and drive the price down even further. This is one reason that short selling stocks is so tricky.

When shorting stocks there are risks that every investor must take into consideration. In general it is very risky with a high potential for profit. For starters there is no way to know 100% which way the stock will fall or rise. You can only make an educated guess based on technical analysis tools and charting. If the price rises, you can lose money and a short squeeze can occur. A short squeeze occurs when a lot of short sellers try to cover their positions in a stock, therefore causing the price to rise even faster. Also, many investors believe the odds are better when trading against the stock market’s history. Historically the stock market has trended up. Of course that is not entirely true of individual stocks which can raise marginal stocks in an active bullish market. Additionally, and perhaps the most obvious is the issue of time. Long terms investors can wait for a stock to rise while short sellers have to get in and get out pretty quickly.

There are a couple of things to keep in mind when shorting stocks. For starters if share price rises unexpectedly, short sellers may panic and close out of their positions. This is especially true if the stock market was looking as if it should keep going down. Additionally, as short sellers start to buy to cover their shorts, it can potentially push the market and other stocks up, therefore creating a bad situation for speculators.

Shorting stocks is a great way to make a living investing in stock however it can be very risky. Investors interested in learning about this trading strategy must have thorough knowledge of how to do it and the risk involved. Additionally, he or she must practice first before trading with real money. Investors can do this through online paper trading and once they feel confident in their strategies and trading plan, they can start trading with real money.

Market Direction: A declining market is usually very painful. The pain we often have felt when holding onto stock positions that continue to go down as the market goes down. What becomes the rationale of most investors in these circumstances? The market will finally turn around and start moving back up. Fortunately, that is usually the case. Unfortunately, the pain of experiencing the decline in stock prices does not disappear even with the prospect of the market eventually going back up. During the decline, there is always the question of whether the market will come back again .What feels extremely fulfilling? Making profits as prices move down. There is a very small percentage of the investment community that has the knowledge or the inclination to make profits as the market is going lower. This usually is the result of most investors who don't know how to identify when markets are going up or going down.

Candlestick analysis makes for a powerful investment tool in all market conditions. It provides a very accurate analysis of the direction of the markets. The less sophisticated investor will not sell stocks even when the market is going down. This is a direct function of the vast portion of the  investment community that does not know how to analyze market direction. It is much easier to rationalize that the markets eventually will go back up. The tendency is to hold a stock position until it bottoms and starts back up. Why do most investors do this? Simply because they do not know what turned the market down, so they don't know when the market will turn back up. They would hate to sell stock and find out later they sold at the absolute bottom. It is much easier mentally to continue to hold and wait it out.

A very simple rule for investing, a trend will move in the existing direction until there is a definite change of investor sentiment. The Japanese rice traders have identified the signals that demonstrate that change. There are many reasons why a market direction 'could' change. The trend is moving toward a Fibonacci retracement level, or moving toward a support level of three months ago, three years ago, or three decades ago, or moving toward a moving average that acted as support sometime in the past. These are areas where a trend " might" be showing  evidence of a reversal.  The benefit produced by candlestick signals  is actually being able to witness what investor sentiment is doing at those levels.


The pain experienced when losing money during a downtrend can easily be converted to exhilaration. Candlestick analysis provides a clear visual graphic of which direction a trend should move. This information is easily implemented into trading entities that will produce profits when prices are going down. Shorting stocks, buying puts, selling calls, or buying short funds will continually produce profits into your portfolio when the majority of investors are watching their equity dwindle away. Candlestick analysis takes the emotions of investing. It also takes the pain out of investing.

If you have been depending upon professional investment advisors to make your retirement secure, these past 12 months of the market have produced a very big reality check. If they do not understand how to time the market, your future retirement plans are being very much altered at this point. Take control of your own financial future. There are people making money in this market. These are people that are using the commonsense elements built into candlestick signals.

A major benefit incorporated into candlestick analysis is the simple rules that have worked well to show when it is time to buy new when it is time to sell. As illustrated in the MDT chart, this downtrend has been hard and fast, producing very good profits on a short trade. When is it time to cover? When a candlestick reversal signal appears. Today's gap down produced a Doji. The gap down is one indication that a bottom is near. The Doji is another indication. With the price being well in the oversold condition, bullish confirmation of the Doji would warrant covering the short position.


Take advantage of the information provided by the Candlestick Forum. Candlestick analysis merely incorporates commonsense investment practices put into a graphic depiction. Once you have learned the basics of candlestick analysis, you have a very good probability of making money consistently from the markets.

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Good investing,

The Candlestick Forum Team

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