A System for Shorting Stocks
Wednesday, February 20, 2008 | Wayne Mulligan
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The article you see below was not written by me or anybody else at TickerHound. In fact, while you would never know it from the quality of the article, it wasn’t written by any “professional” investors or money managers. No sir, the article you’re about to read and learn from was written by two TickerHound members who I’m sure you already know rather well…EthanR and ChaosNantuko!!
Ethan and Chaos (Jordan) approached me a few weeks back wanting to know if they could contribute something really unique and special to the TickerHound community. They felt that their contributions to the site, while good, couldn’t possibly give them the flexibility they’d need for the project they had in mind. They wanted to collaborate on a trading system that would allow anyone - and that means you sitting at home reading this right now - to systemically short stocks and profit from it.
So I said go for it!
And below is what they came back with. Now, just to be clear, this is NOT a recommendation to buy or sell any particular stocks. It is merely a system that Ethan and Jorden devised that they found to be successful and wanted to share it with you and the other TickerHound members.
So enjoy it, learn from it, and even comment on it right here on our blog. I know Ethan and Jordan will appreciate and welcome the feedback.
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A Short Term Method For Shorting Stocks
By Ethan S. Roberts and Jordan J. Weir
Introduction:
A Short Term Method For Shorting Stocks
By Ethan S. Roberts and Jordan J. Weir
Introduction:
The authors’ intent is to develop a method for shorting stocks over a fairly short term period of time, defined as anywhere from a half hour to three days, in which the potential for maximum profit is enhanced, while the risk of loss is minimized.
Investors short a stock when they believe that the stock is weakening and will soon decline in price. The Shorting Process is defined as:
“An investor who sells stock short borrows shares from a brokerage house and sells them to another buyer. Proceeds from the sale go into the short trader’s account. He must buy those shares back (cover) at some point in time and return them to the lender.”
http://www.fool.com/FoolFAQ/FoolFAQ0033.htm
In the past, market rules dictated that you could only short a stock on an uptick, ie. a rise in the most recent price of the stock, prior to entering your short position. However, that rule has recently been changed, and that change allows for greater profit potential from shorting a stock because one can short a stock while a declining trend is already in progress.
One will often hear that shorting stocks is extremely risky because unlike a long position, which can only go to zero, a trader entering a short position could be the victim of a stock going to infinity. However, let’s take a closer look at the real level of risk. First, realistically, how many stocks go to infinity? Second, this belief does not take into account the ability of one to cover their short position in advance with the use of stop loss or stop limit orders, or to simply cover with a market order if absolutely necessary. Third, stocks tend to rise and fall, not go up in price indefinitely. In fact, stocks that rise too fast, in chart terms a “parabolic spike”, tend to fall in price much faster than stocks that rise more slowly.
Shorting stocks can be more profitable than holding long positions if done correctly. Stocks will usually drop in price faster than they increase, and declines are more often to the extremes, than are advances.
Caveats:
Keep in mind that stocks below $5 may not be shorted, and in order to short stocks, one must open a margin type account with a broker. There may be fees involved, and one should check with their broker as to what those fees may be. All trading, especially shorting, can involve risk, and readers are strongly urged to consider that risk if they decide to utilize this method. As our goal is to minimize risk, we do not advocate using margin, but rather maintaining enough funds in the account to cover the trades. The results presented here are non-leveraged results. While using the 4:1 leverage afforded to day traders would theoretically boost returns, we do not recommend the use of leverage to our readers. Each loss will also be increased, and it takes a larger % profit in absolute terms to cancel out a % loss. (If you lose 50% of the portfolio, it takes a 100% gain to get you back to break even). It is also likely that you will need to have a minimum of $25,000 in your account, as the brokerage may deem you to be a “pattern day trader” if you are making at least one trade per day in this manner. The link below explains this term.
http://en.wikipedia.org/wiki/Pattern_day_trader
Since trading decisions are often subjective in nature, even when using objective criteria, our past performance is not and can not be a guarantee of future results for anyone else.
You can read the rest of this amazing article on the TickerHound Blog by clicking here. There are sample trades, charts and even a graph that tracks the performance of the system over a short period of time. Check it out now.
TickerHound Member Spotlight
In last week's TickerHound Weekly I announced that we'd begin doing something a bit special this week - TickerHound Member Interviews!
And this week I'm proud to present our very first interview with none other than the Top TickerHound himself - EthanR! If you've visited the site at least once then you DEFINITELY know who Ethan is - click here to see his stats!
So if you've ever wanted to know a bit more about the guy with ALL of the answers, here's your chance. I've been speaking with Ethan for a while now and I think this was a great interview - I hope you enjoy it as much as I did!
Q: What's your name?
A: Ethan Roberts
Q: Where do you live?
A: Jacksonville, FL
Q: How old are you?
A: 53
Q: How long have you been investing?
A: I started investing in mutual funds in the mid 1980's. But I was always good at saving money, even as a child and teenager. In those days we had passbook savings accounts and Christmas clubs.
Q: What type of investor are you (aggressive/conservative/ETF investor/Technical trader)?
A: With stocks I am an aggressive, short term investor. I typically use about 80% technical analysis in my decisions, and about 20% fundamentals. I do buy some mutual funds and ETF's at times, but most often I am trading stocks. I love to short stocks, and have been working with another Tickerhound member, ChaosNantuko, on developing a high reward/low risk method of shorting. Interestingly, with Real Estate investments, I tend to be a bit more conservative, much more long term oriented.
Q: Do you specialize in any particular sectors? If so, which ones?
I really had not considered this, but after I saw this question, I did some checking. It turns out I buy a lot of retail stocks, energy, gold, and REIT'S. At one time I used to buy the Fidelity Sector Mutual Funds, but usually now I prefer to buy ETF's because you can move in and out of positions much quicker.
Q: What do you do for a living?
A: I am sort of eclectic. My wife, Susan, and I own a Real Estate company, Harbor Lights Realty, in Jacksonville. I manage the office, and do some occasional residential and commercial sales. However, my passion is more for investing, in both real estate and stocks. I am also a writer. In the last six months, I have been contributing member articles to "The Tycoon Report" newsletter. In fact, one of them was recently picked up and run by Reuters.com and USA Today.com. I would really like to become a staff writer for a newsletter, or perhaps start my own in the future.
Q: How did you get started in investing?
A: I started listening to Sonny Bloch's financial talk show on AM radio. This sparked my interest, and so I began to read a lot about real estate and stock investing. For awhile, I did nothing more than buy mutual funds for my IRA account. Then, in 1994, we moved to Florida, and ten months later we bought our first home. This was a lengthy process and it re-kindled my interest in real estate. Homes were very inexpensive in this area at that time, and a year later we decided to buy our first real estate investment. Since that time we have bought, rented, and sold many homes. We almost always buy foreclosures, and we do much of the work ourselves. In the past two years, with real estate not doing as well, I have become more interested in stocks and in short term trading. But we still own a handful of rentals and will be looking to purchase more when we feel the market has bottomed.
Q: Who were your biggest influences for investing in the stock market?
A: Peter Lynch and William O'Neil were two large influences on me early on, and I learned a lot about the fundamentals of stocks from them. However, the day my life really changed was in the 1990's when I first saw John Murphy on CNBC. What was this technical analysis he kept talking about? So I bought his book, which is pretty intense, and about 500 pages long! Reading that book just blew my mind. It opened up a whole new world for learning not only HOW to invest in stocks, but WHEN to invest in stocks. In the last six months, I have also been fortunate to discover "The Tycoon Report". From Chris Rowe, I have learned the value of expanding one's view of the internal market and sectors, with his emphasis upon the Bullish Percent Index and Point and Figure Charts. I have also been trying to improve my grasp of using Candlestick patterns in trading as well. I find them absolutely fascinating, but not so easy to learn them all!
Q: What's the most (percentage wise) you've ever made on one investment? Which stock, fund, etc. was it? Why'd you buy it, what was the story behind it?
A: I bought the AIM Asia Pacific Growth Fund (ASIAX) a few years ago, because that region of the world had been really down for several years. At first, the fund fell a bit more from where I purchased it, but eventually around 2004, it bottomed. From then until the end of 2007, it did nothing but go up. I sold my position because it looked like Asia was topping, and it has gone down since then. I think the profit was about 140% over a period of about 30 months. I have also had a similar profit result with a Robertson Stephens Natural Resources Fund (RSNRX). That was just a momentum play, but it worked out just as well.
Q: What's your worst investing "war story"?
A: I bought Harley Davidson last year right the day they settled their strike. The stock had fallen from its highs because of the strike, and I stupidly assumed that with the strike settled, the stock would go back up. Wrong! The strike hurt their sales quite a bit, and there were other troubles too, and the stock just sank. I compounded the mistake by not putting in a stop loss order, thinking that the stock was going to turn around and not wanting to get stopped out. I lost about 13% on that trade, which is about twice what I would normally allow myself to lose on any trade. Worse than the loss of money, it is that feeling in your gut that you should never have allowed the loss to go on that long. Sometimes it hurts more to admit you are wrong than to lose some money. Stubbornness, or Ego, is a very dangerous thing in investing!
Q: Why do you enjoy using TickerHound?
A: I have to admit it's my healthy daily addiction! I enjoy sharing what I know with others, and I also enjoy learning things that I don't know from the others on the site. There are some great minds on this site. Sometimes I know part of an answer at first, so I decide to do some Internet research to help me formulate a more complete answer. And by the time I am done, I have learned a whole lot more than I knew at first, and am able to help someone else at the same time. That's a good feeling. I also like using Tickerhound because so far I haven't had to deal with pop up ads and other kinds of nonsense that you see on other sites. To me, it feels like I am in a library with a group of people every day, just talking about finances. And I was one of several people who was invited by Wayne to contribute to the development of the web site, both in format and content. So that's a great feeling too.
Q: If there's one thing you hope to share with other investors, what would it be?
A: Investing means you have to learn all the time. You can never stop reading and listening and trying new things. Respect all methods that are successful, even if they are quite different from your own. To be the best, learn from the best. Also, it is imperative that you learn about yourself, your own psychology, and how it effects the decisions that you make in your trading. If emotions like greed or fear are killing your profits, you have to work hard on changing that within yourself if you are going to be a successful investor.
Thank you, Wayne, for inviting me to do this interview, and for all that you do with Tickerhound!
No Ethan, thank YOU for sharing your story with the entire community! And for your tremendous contributions to the TickerHound community as a whole - the site wouldn't be nearly as complete without your contributions.
I hope Ethan's story has given you a little insight into Ethan as a person and as an investor. I also hope it's inspired you to give back and contribute to the TickerHound community...even if that means answering only 1 question a week, it's still a step in the right direction of educating and empowering individual investors, just like you!
*TickerHound Challenge*
We had some solid answers come in for last week's challenge. It was a tough call on one of these - very close. But a winner had to be picked and here they are:
1. What is the 1 stock you would continue to hold even if it got cut in half tomorrow?
This one went to a fairly new member of the TickerHound community: happyfeet (love the name by the way!)- congrats! That was an extremely thorough answer! Click here if you'd like to read what happyfeet's top stocks were.
2. What's the best personal finance software?
The top spot for this question went to the only person who answered it - come on guys, I know you can do better than a single response for these challenge questions, I hope to see more this week - and that was MNSL! Congratulations!
Click here to read his answer and be on the look out for MNSL's interview which will be appearing here and on the blog next week!
3. What nontraditional market indicators should we use to get an edge in our trading strategies?
This was a question I personally crafted so I was eager to see what we got back - and there were some great answers. Unfortunately we could only choose one. So the Best Answer went to none other than EthanR!
Great job Ethan! There are some great tips in here for how to gauge the market (they certainly don't teach this stuff in school!). Click here
This Week's Top TickerHounds
Before I go into next week's Challenge questions, I think it's worth mentioning that we had 3 BRAND NEW members hit the Top TickerHound list this week.
It's great to see new faces up there helping out other investors...great job guys, keep it up and feel free to send in your own answers to the interview questions I asked Ethan...I'm sure the rest of the community wants to know who you are too!
First we have 7million7years, a successful entrepreneur who feels like TickerHound is a great way for him to "give back" and share his success with others. A very admirable and inspirational member of the community - I know I speak for everyone when I say I hope he continues to be an active answerer on TickerHound.
Next we have happyfeet - not only did he win this week's challenge, but he's also been keeping busy by answering several questions across the site this week as well. Keep up the great work!
And finally we have MoresbyChief - he's been a TickerHound for the last few weeks but this is his first week on the Top TickerHound list. Congratulations and hopefully next week you'll be right at the very top of the list!
Now, onto this week's TickerHound Challenge Questions:
1. GSK has a terrible chart but Buffett just took a stake - what do you think an investor should do?
2. What criteria do you use for selecting a full service broker?
3. If you won the lottery tomorrow how would you invest the money? to see Ethan's tricks for predicting the market!
(Please let us know what you think about Wayne Mulligan's article.)
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Wayne Mulligan
CEO
TickerHound
