Many traders want to learn how to Sell Short to make profits as the market moves down.
They often assume the sell side is simply the opposite of the buy side. And that is why so many traders do not make the profits they hoped when the market trends down.
There are many factors that make the sell side price and volume action different from the upside.
First, stocks are like airplanes; they need lift to move up so lots of volume or buying is needed to maintain price moving upward in a trend.
But to the downside, stocks can and do drop in price with very low volume. Think of an airplane again, when there is no air or lift the plane stalls and falls. As a plane moves upward into the sky, the angle of ascent is critical because if the plane goes beyond the point where air or wind is lifting its wings, it will stall and the stall will be dramatic and swift.
That is how stock prices behave. Without volume and buying going on, there is nothing to hold the price up so if price slips on lower volume it doesn’t always mean that selling short has commenced.
The first move down for a trend is not traders selling short but Profit Taking by traders who have made a nice profit and have decided to exit the stock.
These are savvy institutional investors, wealthy private investors, and funds managers who have decided for a variety of reasons to sell the stock and go buy a different stock.
Often retail traders mistake this profit taking mode for selling short opportunities only to get thoroughly whacked as smaller funds, investment groups, and less savvy investors and traders “buy on the dip” that is created as the big funds and smart money are rotating out of the stock.
These institutional investors are very careful as they sell out of a stock for profit taking to not disturb price much so they tend to take several weeks to sell out.
This creates the up and down price action you see below. Savvy institutions, funds managers and traders are rotation out while smaller investors are buying the stock 'on the dip'.
This is not a good scenario for a retail trader to make profits selling short because there is insufficient points gain to make decent profits and the risk of a whipsaw trade is very high. This is a high risk trading scenario buy many retail traders try to trade these patterns with dismal results.
Chart 1
The TTQA is showing with the gray bars how the institutions are carefully exiting this stock and smaller funds are moving in. Volume also shows that the sell side is more dominant than the buy side.
But the range is only a couple of points, far too small for a retail trader to get in and out with profits to cover expenses.
Other indicators that help you see the institutional profit taking selling are flow of funds and volume accumulation. Both expose the weakening upside action. The profit takers are in control of price at this time. Flow of Funds are moving out of this stock and the volume is weakening to a distribution pattern rather than an accumulation pattern.
Chart 2
Since this is a sideways action RSI and stochastic are ideal indicators also to study and both are showing the lower highs and lower lows of a weakening sideways price action.
Chart 3
So who has been in control of price during this sideways pattern of the past few weeks?
Not sell short traders, but Profit Takers who are large lot and institutional funds investors.
Why are they selling for profit at this price level?
Because the stock has hit a yearly high resistance level and so they are rotating out of this stock. They are controlling price by selling incrementally and slowly over time, they know that each time the stock drops to the weak support level, more small funds and small lot investors will rush in to buy on the dip. This is a controlled price pattern that is dominated and ruled by the institutions who are selling for profits.
Chart 4
But until Professional traders start selling the stock short the sideways action is likely to continue.
If you want to be a profitable trader selling short, you must wait for the confirmation of the professional, high frequency, and institutional trader selling short as these are the traders who can drive price down with velocity and momentum.
If you try to sell short during the profit taking and buy on dip period, you will get whipsawed out of your trades with little to no profits and risk a huge loss on a sell short as the stock suddenly moves up rather than down due to buy on dippers.
Knowing who is in control of price before you put on a trade will help guide as to when to enter, how long to hold, and when to exit.
Trade wisely,
Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner
(c)2011 Decisions Unlimited, Inc.
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