Dear Reader,
We’ve been talking about it for weeks – the seasonal bull pattern that powered the markets higher in May, June, and half of July is over, and seasonal bearishness has arrived.
Of course, the Money Calendar saw this coming, going back to the last week in July.
Take a look…
And that bearishness has continued into August…
Now, if you’re a stock trader, long stretches of bearishness can be tough. You basically have two choices:
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You can head to the sidelines and wait it out…
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Or you can short stocks and profit when they go
That’s exactly what we’re going to talk about today. If you’ve never shorted stocks before, don’t worry. Learning to short stocks is a simple 5-step process.
And it all starts with…
1. Understanding Short-Selling
Before we get started, shorting stocks is risky. It’s far more risky than buying shares because as a buyer of stock, the most you can lose is 100%.
With shorting, your risk is unlimited – because, theoretically, a stock can go up forever.
But shorting gives stock traders a way to profit from the downside. And if you’ve got a solid trading plan – including ironclad risk management, it can be very profitable.
With that out of the way, let’s talk about what shorting is…
Shorting is essentially a bet that a stock will go down. Here’s how it works:
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Borrow Shares: You borrow shares of a stock from someone who owns them. This is usually facilitated by your brokerage.
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Sell the Borrowed Shares: You sell these shares at the current market price.
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Wait for the Price to Drop
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Buy Back the Shares: Once the price drops, you buy the same number of shares back at the lower price.
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Return the Shares: You return the borrowed shares to the lender and pocket the difference between the price you sold them for and the price at which you’ve bought them back.
Now, before you get started short selling, you should be aware of three things.
First, shorting comes with additional costs that you should be aware of.
First, your broker may charge a borrowing fees You might have to pay a fee to borrow the shares. This depends not only on your broker, but the specific stock you’re targeting as well.
Second, your broker will charge you interest on any borrowed funds, known as a margin loan.
And third, if the stock pays a dividend while you’re short, you’re on the hook to pay that divided to your lender.
On top of added fees, shorting can be highly regulated, depending on which country you live in – so make sure you understand any rules that might apply in your region.
2. Get Set Up to Short
To go short, you’ll need a margin account. This is different from a regular brokerage account because it allows you to borrow money (and in this case, borrow shares) to trade.
Talk to your brokerage about opening a margin account if you don’t already have one. You’ll need approval from your brokerage account and will have to fill out a bit of paperwork.
You’ll also need to deposit a minimum amount of money into the account as collateral for borrowing shares from your broker. The amount of money required in a margin account varies, so check with your broker to see how much capital is required.
3. Find the Right Stock
Again, because of the theoretical risk of shorting stocks, you’ll need to have your trading system firmly in place before you begin.
For me, that means consulting the Money Calendar…
Because the Money Calendar not only tells me which stocks go UP over the same timeframe at least 90% over the last decade, it tells me which stocks consistently go DOWN…
As I just showed you, the Money Calendar is predicting a bearish market this August, and I know the best patterns to trade – the ones that have repeated over and over again at least 90% over the past decade.
Take a look…
When markets are bullish, I look at the green bars – those are stocks with bullish patterns beginning on August 15.
But when markets are mostly bearish, I’ll look at the stocks with red bars – those are the bearish patterns that begin on August 15.
Just like with bullish trades, I’m looking for stocks that have consistently moved down during the same timeframe at least 9 out of 10 years.
That means the pattern has occurred 90% of the time over the last decade, giving me an edge to help me mitigate my risk.
Bottom line, when you’re taking on the risk involved with shorting, you want to mitigate that risk by selecting high-probability trades.
4. Plan, Execute, and Manage Your Trade
Now, once you’ve zeroed in a stock you want to short:
Plan Your Trade: Before you put any capital at risk, you should know: how much capital you’re putting at risk, the price at which you want to sell shares, how far the stock is going to drop, and where your profit target is.
Execute Your Trade: Use a sell-to-open (or what I call an STO order) to sell shares. You’ll need to specify the number of shares and the price (you’ll want to protect your capital on entry by using a limit order).
Manage your Trade: Whether you’re long or short, you must always stick to your trading plan. That means
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Set Stop-Loss Orders and Profit Targets: To protect yourself from significant losses, set stop-loss orders that automatically buy back the shares if the price rises too much. Likewise, to protect your profits, you’ll want to enter your orders ahead of time.
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Be Prepared for Margin Calls: If the stock price goes up, your brokerage might require you to add more money to your margin account to cover the loss on your borrowed shares.
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Stay Informed: Follow the stock’s news and any market conditions that might impact its price.
5. Stay Calm and Patient
Shorting requires patience and a clear head. The market can be unpredictable, so it’s important to stick to your strategy and not let emotions drive your decisions.
Just remember: plan your trade and trade your plan.
Based on the decades of seasonal market data at my fingertips, we’re likely going to see bearishness continue for at least a few weeks…
And in Stock Cycles Trader, I’m showing my readers exactly how to trade it, with the best Money Calendar stock recommendations every single week.
Whether markets move up or down over the next six weeks doesn’t matter – because I’ve got 10 years of data that tells me exactly when to get in and out of the best stocks in the market for quick double-digit gains in about 30 days.
Even on stocks going down.
Click here to learn more – and I’ll be back with you tomorrow!
Good trading,
Tom Gentile
America’s Pattern Trader