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Short Sell

To short sell a stock means that an investor sells a security that he or she does not own or it is any sale that is completed by the delivery of a borrowed security by the seller. The goal when selling short is to be able to buy back the stock at a lower amount than the price that the stock what sold. Basically, investors make money when short selling stocks if the stock price goes down. This strategy is used by very experienced stock traders only and novice investors are advised against this type of trading.

In order to begin to short sell stocks you must first set up a margin account. You can do this through a brokerage firm. When shorting stocks you are buying stocks on margin or in other words, you are borrowing shares of stocks from other accounts with the help of your broker. Once you are ready to sell, if the price of the shares decrease, then you buy the shares again at a lower price. Then you can return the shares to the accounts that you borrowed from and you can keep the difference as profit. Of course if you were incorrect in your assumption and the price of the shares increase, then you have to buy stock back at a higher price and therefore lose money. One way investors limit their risk when short selling is to use stop loss orders. These orders trigger a stock buyback once the price goes above a certain point. The investor still loses money, but the stop loss order limits the loss.

Some investors will short stock in order to offset the risk that stock they already own will go down. Other people practice short selling when they sense an opportunity to make money when a company’s stock price is weakening. Back in October of 2008, a ban and temporary short selling rules were put in place by the government in order to prevent short selling from eroding the stock market value. There were claims that short selling contributed to the drastic drop in shares price of some of the bank stocks. The ban however was ultimately lifted but if temporarily affected almost 800 stocks.

If you are considering learning to short sell stocks, make sure that you are aware of the potential fess you have to pay stock broker as well as the risks involved. Understand what happens if the stock price goes up instead of down and what a margin call is. You must also have a clear understanding of stop loss orders as well as stop loss strategies and techniques that you can use in order to limit your risk when shorting stocks on the stock market. Again, shorting stocks is not for the novice investors, but is perhaps a trading strategy that can be used once the experience in attained.


Market Direction:  When to take profits? That is one of the most difficult processes for most investors. The emotional factor comes to the forefront. "I don't want to give up my profits!"  "I don't want to get out too early!" This tug-of-war occurs with many investors after they have produced profits. Candlestick analysis becomes an important part of identifying when it is time to take profits. Cut your losses short and let your profits run are an important part of investing. We often illustrate the fact that most investment advisors profess this concept but they never explain how to do it. Candlestick analysis makes this process very easy. The signals demonstrate a change of investor sentiment. Witnessing this change in an oversold condition is done with reversal signals. When prices immediately negate a reversal signal, that demonstrates the signal did not work, close out the position immediately. That is the way to cut your losses short.

The same concept should be utilized when letting your profits run. Until a candlestick sell signal appears in a trend, it can be concluded that the trend is still going in the same direction. Today's market indexes did not show any change of investor sentiment until the later part of the day. The Dow formed a Shooting Star/Doji day. The NASDAQ formed a Bearish Engulfing signal after a small Hanging Man signal on Friday. This makes taking profits that much more feasible tomorrow. Further weakness in the premarket futures would make a test of the T-line a likely prognosis.

DOW

Nasdaq

Taking profits! The whole point of investing is to produce profits. Many investors have a great difficulty when it comes time to close a position. What if the prices move higher? This is often the fear most investors encounter. Fortunately, with candlestick analysis and the speed in which trades can be executed, this fear should be completely eliminated. The signals will indicate when profit-taking/selling starts coming into the price trend. Having knowledge of what should occur during a price trend allows the candlestick investor to take profits at the appropriate time and repurchase a position at the appropriate time.

This may involve price patterns such as a J-hook pattern. Having the knowledge of what should occur after price trends allow an investor to be prepared to exit and re-enter trades at the time when the probabilities safe to do so. The trend evaluation becomes much more defined when knowing what the signals could be doing as far as forming a potential price pattern.

Today, BAC reached our first target, the 50 day moving average. Once it did so, it formed a Doji. This makes the trading strategy fairly easy to implement. Although the stochastics do not show an oversold condition, the Doji at the first resistance level provides possibilities of some profit-taking. What should be the trading strategy at this level? Once the price had gone up through the 50 day moving average, if it came back down through that level, taking a half the position off would be on high probability situation. Why? If the price is coming back down through the observed resistance level, it would be indicating a possible failure to maintain that level.

That might create a candlestick reversal signal. In this case, a Doji was formed. It formed a good distance away from the tee line. A lower open tomorrow would warrant taking profits on any remaining open position. Does this necessarily mean the uptrend is over? Definitely not, but the short-term probabilities indicate a possible test of the tee line. Observing support at that level would warrant repurchasing the position.

BAC

BAC should have created approximately a 30% return over the past five trading days. Watching for a pullback to the tee line could allow for another 30% gain or even stronger on the next move up. The major advantage candlestick signals provide for investors is a clear and concise visual interpretation of what is occurring at obvious technical levels. Taking advantage of this information provides two simple benefits. It allows an investor to be on the right side of a trade a great percentage of the time. It also allows an investor to clearly evaluate when and where the next price trend should be taking place.

Take advantage of the information built into candlestick signals and patterns. This is not a subjective education process. The information built into the graphic depiction of investor sentiment is a study of reoccurring price patterns that are created by the human psyche. Once you understand what the signals are representing, you will be able to control your own destiny as far as producing consistent profits in the market. This is information that the majority of investors never consider. The majority of investors base their position upon fundamental evaluation. Fundamental evaluation had a completely different outlook than technical evaluation one year ago.

Members Chat session tonight at 8 PM ET- Log in to the Members' Area for instructions.

Good investing,

The Candlestick Forum Team


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