In my experience the easiest stocks to short are ones that have gapped up either pre market or throughout the day from a gap finding scanner. I am looking for stocks that have positive news but does not include mergers and acquisitions, covid news, stock splits, or any type of capital raise. The resources I use for this are Pre Market | Stock Market Watch (thestockmarketwatch.com) All US Exchanges Gap Up - Barchart.com, and the ThinkorSwim scanner which I program for gap ups above 20% and at least 1,000,000 volume. Also, the bid ask spread must be tight in correlation with the high volume at that present time of the trade. A stock could show 5M volume put volume could be dying off giving a false read. This is why it is imperative to use a volume indicator which will show volume at that particular time. More on that later.
It is human nature that positive news causes many traders to buy as the euphoria pulls them in. This over reaction cause prices to spike even beyond valuations and what is reasonable resulting in a great opportunity to start a short position to help bring prices back to reasonable valuations.
It is imperative to establish support and resistance lines in the charts that include the previous day and to also watch a longer term chart such as the 6 month to see where the share price is in relation to the gap up. I have five indicators I use to determine when to get in a short. RSI, Volume, Support and Resistance, Price Action (time and sales), and my Standard Error Channel. Other channels can be used to your liking such as bollinger bands, etc. Note, my trades are set up to automatically put all orders in at the same time including my sell (short), buy limit (cover), and buy stop orders. This must be set up first to make any trade in the market. Most brokers allow you to set these orders up all at the same time by using hotkeys. Fast, easy, automatic.
It is imperative to have an exit plan before you buy or short a single share in the market. There are generally no exceptions to this. Our support lines in our technical analysis should already be established and our buy to cover order should already be set. This for me includes my Standard Error Channels that show channels of buying and selling zones. As far as closing out orders I rarely use a buy limit to close a short. I use buy stops instead so I can maximize profits by bringing my buy stop down in correlation with the dropping price action. By doing so I will be stopped out on the way up when price action pivots to the upside due to increasing buy volume and both RSI and my Standard Error Channel are in the buying zone.
Never argue with your trading plan. When you have your stop buy in let it do it's thing. The price may go lower but if indicators are telling you to get out then get out. There is no such thing as a perfect trade except for following your trading plan. Tops and bottoms can rarely be predicted and are very difficult to pinpoint. Consistantly making money in the shorting game is made in between those points by selling (shorting) on the way down and buying (covering) on the way up.
This example clearly shows the potential to increase total gains by using the channel for entry and exit points. In this case it was a 68% increase in gains!!! Note, rsi and volume were instep with the price drop. All indicators must be considered when channel trading.
We use cookies to analyze website traffic and optimize your website experience. By accepting our use of cookies, your data will be aggregated with all other user data.