The New Sell and Sell Short: How to Take Profits, Cut Losses, and Benefit from Price Declines, Expanded Second Edition

CHAPTER 7

SHORTING STOCKS

There is one common prejudice from which you must free yourself in order to sell short. Most people feel comfortable buying but feel uneasy profiting from declines. I think they acquire this prejudice as young adults. When I taught a class on trading at a local high school, the kids took to shorting like fish to water. They had to bring in trading ideas, and we would discuss them in class and trade them in the account I had opened for that class. On any given day the kids would make as many suggestions to sell short as to buy. Often the same kid would bring in both a long and a short.

The kids got it. They understood that trading means betting on the direction of moving objects. It matters little whether you bet on a rise or a decline. You only need to get the direction right and determine the most promising entry point, profit target, and a protective stop. The kids came to the market without prejudices and had no inhibitions against shorting. The class bagged some profits on the way up and on the way down. It also took some losses, but we made sure they were smaller than our wins. We played the game in both directions.

It is my belief that short-sellers, while pursuing their own selfinterest, provide an important public service in the markets. First of all, by selling overvalued shares, we increase their supply and dampen excessive market volatility. Selling more stock when prices are high tends to smooth out wild peaks. Second, when a stock is ...