This is a method that I learned from IBD. For more great trading methods, check out their investor education section.
If you have read into the CANSLIM method of trading, you would know that one of the keys to making a lot of money going long on a stock is to buy it as it breaks into new highs. When it comes to selling short, it would make sense that you would short when the stock falls to new lows.
Unfortunately, this is not the case. The most profitable way to short, is to short when it isn’t obvious.
Take a look at a past chart of Goldman Sachs (GS). We know that the stock took a big fall, but when is the right time to short?
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So what would happen if you took a short position here? Here’s the chart 5 days later:
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Let’s be honest, 30% in 5 days is an intoxicating amount. About that time, almost everyone would be drooling in the idea of making even more except for the technical analysts that could have seen the support show up as GS closed well off lows the last 2 days.
Now, had you held a short of GS for 1 more day here is what would have happened:
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In just one day, GS rebounded almost 20%. This would scare most investors into taking profits on what they had and moving on. The best way to short GS would be to short after the pullback. Here is a chart to explain further:
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I understand that this is all in retrospect and that it is a lot tougher to do this in real time, but the concept is the important thing to grasp here. This strategy will keep you from getting stopped out of your shorts and will lead to a higher percentage of winning shorts. Take your time and be patient. Let me know if you have any questions or suggestions!
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