Indian Markets have Hit an All Time High today Nifty crossing its previous High of 12430.Lot of traders have been Shorting this market and making Big losses as Market continue to rise. In Todays Post we will discuss certain rules which all traders need to follow for SHORTING.
If you have reasons to believe that a market is going to go down, you can make money by short selling that market. Short selling (also known as going short or shorting the market) means that you’re selling the market first and then attempting to buy it later at a lower price.
When it comes to shorting Stock or Index futures , many people are in the dark. It is more challenging to be short, subject to squeezes; the return max out at 100% — versus unlimited upside for longs.
Markets tend to go down faster than they go up. This is because fear is a stronger emotion than greed. When people feel fear, they tend to exit their long positions quickly and massively. Markets can go into a free fall, and therefore it’s generally possible to make money faster by short selling than by buying, at least for brief periods of time.
Shorting stock definition:Shorting means selling first the borrow stock and buying later at lower price. The difference between selling and buying at lower price is termed as profits excluding brokerage and slippage.
Basic Rules for Shorting Stocks which should be followed by traders.
1. Never short a Momentum stock: Traders love to short stock which is making highs or rising very fast. Never do this as this will be injrious to your financial health. I still remember how many traders lost money shorting RNRL and RPL in 2008 and Reliance in 2020. Recently the Huge rise we seen in Banking Stocks.Unless you are Superman, never step in front of a speeding train
2. Never short based on Valuation alone:It is insufficient reason to get short a stock/Index — NIFTY is tradinga t a Price to Earning Ratio of 33 + having very rich and expensive valuation but NIFTY keep rising. Never fight the liquidity driven Stock Market. History teaches us that cheap stocks can get cheaper, Expesnive stocks can get more expensive.
3. Never short without pre-determined loss – Never short a stock without having proper stoploss and targets. Do not be greedy when you get decent profit Book your profit and exit out of market.
4. Fundamentals tell you WHY to short something, not WHEN to short it. ALWAYS have some technical confirmation before shorting. Make a short selling wish list, then WAIT for technical confirmation. (We use Gann and TIME CYCLE ).
5. It is tough to be a contrarian: During Bull and Bear cycles, the Crowd IS the market.
You have to figure out two things:
…a) When the crowd is wrong — Doug Kass calls it “Variant Perception”
…b) When the crowd starts to get an inkling they are wrong
At the turns — not the major trends — is where contrarians clean up.
6. Beware the “Crowded Short“– they tend to become targets of the squeeze! Like we are seeing Currently.Retailers are short in market and it becomes a Crowded Short and small rally can squeeze the shorts.