Target Companies
In order to best perform a short sale, you need to target companies that have declining sales and declining earnings. Whenever moving into a short sale, this is the way to go.
Large Size
While looking for companies and stocks to deal, it is a good idea to look towards stocks that not only are performing poorly, but for stocks from a large company, especially if it has a declining public image. When this happens, it creates a large supply and higher selling pressure. All of this works well with shorting stocks. Additionally, larger companies are more likely to eventually turn around with the stock prices for a variety of reasons (changing CEO, better quarter numbers and so on). This means you will have a better chance to short sell the stocks and reinvest if you want to pick up more for your money.
Market Intermediate Term
It is best to only short sell stocks when the market’s intermediate term is currently trending down. If it is trending up there is a chance the stocks might increase in value even when there is a slight decline within the specific company.
Never Guess
The thing about short selling stocks is you never want to just guess at what might trend down and what is trending up. This will end up you firing off stocks randomly and could potentially lose more money than you gain. Instead, you only want to short sell the stocks that are trending down.
Cut Losses Short
When cutting your stocks, it is necessary to cut your losses short whenever possible. If the stocks begin to rally, it is best to try to hold off your losses to around 10 or 15 percent.
Don’t Get Greedy
This is a mistake many people make. They see the money start to roll in and let it ride. The thing about short selling stocks is eventually the stock will turn around on you and the profits could evaporate quickly. Instead, it is better to cash in on the money you make while you can. After you make a good profit over an extended period of time, your best bet is to take your earnings and cash in.
Timing is Important
The best way to perform a shorting of stocks is to follow specific timing. The best time to sell is after the end of a rally in the market where there will most likely be a lull. There usually is a 50 day moving average, which is the perfect timing period to perform the short sell of the stocks.
Bear Markets
The best course of action when performing short sells is to generally target in on bear markets. While it might seem a bit obvious, this is a necessary course of action you need to make sure you follow. When you fail to follow through with following a bear market, you are more likely going to pay a steep price on the other side. The thing about a bear market is a true bear market doesn’t come around all that often. Typically one comes around every three to four years and lasts a year and a half. The rest of the time, the market pushes higher. That is why you need to focus on timing, as mentioned in the previous tip. Otherwise, you’ll end up spending far more than necessary (and losing out at the same time).
Late Over Early
When buying a stock it is always better to be early than late. That way you have time for the stock to take off financially. However, the same is not true in the world of shorting stocks. When you buy early you will cost yourself money. Instead, it is much better to be slightly late when short selling than slightly early.
It Moves Quickly
Stocks generally climb at a steady pace. Outside of a few rapid increases due to specific news from the company, it is a steady pace. However, the same is not true with value declines. Stock declines happen much faster. In fact, a stock decline sinks three times faster than a stock increases in value. That is because bad news tends to travel faster than good news. This also means you have less time to work with on a short sale.
Not Unlimited
There is a common misconception when it comes to shorting stocks and that is it has both unlimited potential and unlimited risk. Fact of the matter is it is limited on both sides. After all, when buying a stock all you can lose is the value of the stock. So there are limits to keep in mind. This may not affect how you buy and sell the stocks, but it is important insights when weighing whether or not the risk is worth the reward.
Not All Stocks Work
One bit of information you need to keep in mind whenever considering shorting stocks is whether or not the stock can even be shorted. Most stock brokers you work with will not allow you to perform a short on a stock with is valued at under $5 (this is because all sorts of fiddling around can occur with penny stocks, so this is typically not an option for you to look into). Additionally, your stock broker may not perform shorting if the stock is not being heavily traded. This is because it is difficult to find shares for you to borrow. It is a good idea to talk with your broker to see what stocks you own you can short.