What are some good stocks to short? Are you looking to dip your toes in the short waters? Perhaps you’re looking for a new edge in your trading? Surprisingly, short-selling stocks are not that different from attempting to go long. If you’re looking for stocks to fall short, keep these five golden rules in mind before you jump right in. Then, you’ll be safely short-selling.
Do you know how to find stocks to be short? What is short selling? It’s taking advantage of a move down. You’re borrowing shares you don’t own from a broker. As a result, you need a broker that allows short selling. And you’re going to need some good trading rules. So, let’s get into the rules you need to follow.
1. Stocks That Are Trending Down
If there’s one thing I know for sure, it is this: the trend is your friend. It shows you the hard truth, even if it doesn’t tell you. You know the momentum shifts in your hearts in the stock you shorted.
It would be best if you dared to listen and put the ego aside. If all indicators are screaming, a pop is coming – think 9/20, VWAP, 50 SMA crossover to the upside with a strong volume surge – get out and get out now! I get it; it’s nice to dream of nailing a ridiculously overextended stock and riding it down. But if I must give one piece of advice, do yourself a favor and wait.
Since trends tend to continue once in place, you’d be wise to heed your friend’s advice. Put the odds in your favor. Wait until the reversal is confirmed, then jump in—you can thank me later.
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2. Catalyst Driving the Move
Once again, like the first, this rule ensures that the odds are forever on your side when you are short. Like a hawk scanning for prey, momentum traders will scan carefully for catalysts.
Like a hawk swooping in on their prey, they strike when the time is right. Many have their ears to the ground, looking for undervalued companies or flying slightly under the radar.
They were perhaps looking for companies about to release a new product. Catalysts, in their purest form, are anything that will cause a drastic move in a stock’s price.
Typically, this comes in the form of new, unexpected news. Many investors, and rightfully so, look to capitalize on these short-term opportunities.
On the other hand, you should fear a significant move in price without a catalyst like a plague. What comes to mind here is the “pump and dump.” It is illegal,
Typically, the stock is promoted as a “hot tip,” being “the next big thing.” Someone is stirring up the pot, trying to churn interest in the company without a valid reason.
Once everyone who didn’t want to miss “the next big thing” has bought in, the shareholders dump the stock, and along with it goes the price.
Consider yourself warned, or you could be the prey.
3. Stock Has a Long Way to Fall
Humans are a funny bunch, in my opinion. And it still amazes me to this day how quickly the mood or sentiment of the public can change just by simple news.
Take the 2018 Facebook (FB) privacy scandal, for example. December saw an all-time low of $123.02, down almost 50% from July. You could have ridden it down if you caught it on the downside when news broke.
Alternatively, buy put options if you don’t have the capital to purchase the shares immediately. Now, everything that goes down comes up. So you could have ridden the call train on the way back up. Last month, it hit a high of around $200.
Even more astonishing is when that news is false. In 2013, a tweet about two explosions in the White House wiped out more than US $130 billion in stock value in minutes.
Even more astonishing, the Dow Jones Industrial Average dropped about 143. 5 points. In a later news release, AP said its Twitter account was hacked.
Rumors have a nasty way of lingering long after the dust has settled. And the fall from grace can be long and hard.
Your job as a short-seller is this. Find these falling stocks and short the heck out of them.
The Risks of Stocks to Short
When you “go long” or buy a stock, you hope the price will increase. The most you can lose is the upfront cost of entering the trade. But your profits are unlimited if the price keeps going up and up and up. In other words, there’s no ceiling you can hit.
On the contrary, when you short-sell a stock, you hope it falls to zero and hits the floor. But what if the tides turn and the prices rise? Without a ceiling, there’s no limit to the amount you can lose.
Luckily, this can be avoided with tight stop-losses and proper risk management. Our risk management video shows you how.
Not Trade on Margin or Use Leverage
Unless, of course, you’re a seasoned expert. If not, you’ll quickly be a seasoned gambler. To summarize, margin allows you to borrow money from your broker so you can place larger trades.
With margin comes leverage, or the ability to enter larger trades. For example, you had $25,000 in your trading account with 2:1 leverage. In the trading world, this means even with only $25,000, you can purchase $50,000 of stock.
I don’t think I need to explain the dangers here. You can quickly see how deep the hole you can dig is.
Final Thoughts: Stocks to Short
Those who know me know I have a bias toward short selling. I find it easier to spot stocks that are overextended and primed for a reversal.
That’s my edge. For some reason, I get hesitant and don’t want to jump in a stock that is riding up. Even if the indicators tell me to, that’s me and what works for me. So, if you want to find your edge, join us today!
Frequently Asked Questions
A good stock to short has a technical analysis, which shows bearish moves. You want the price to fall to make money.
Shorting allows traders to take advantage of bearish moves. However, you need to make sure you have risk management and a trade target in place.
Look for overbought stocks, bearish candlestick patterns, and moving averages showing bearish signs.
Short selling is legal. It's seen as important to liquidity and allows you to bet against an overbought stock.
