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

SHORTING TOPS

Shorting near the top tends to be harder than buying near the bottom. At the end of a downtrend, markets often appear exhausted and listless, with low volatility and tight price ranges. On the other hand, when prices are boiling near the top, you can expect high volatility and wide price ranges. If buying can feel like climbing on a horse that is standing by a fence, shorting can feel like trying to mount a horse running in the field.

One of the key solutions for this problem is money management. You need to short smaller positions and be prepared to reenter if stopped out. If you commit all your permitted risk to one entry, a single false breakout will kick you out of the game. It pays to trade a size smaller than the maximum permitted by your money management rules. It makes sense to keep some risk capital in reserve. You need to be able to hold on to your bucking horse (Figure 7.9).

Figure 7.9 JCP weekly

Figure 7.10 JCP daily

During a webinar in January 2007 a trader named Deborah Winters asked me to analyze JCP. I had not looked at the stock in years but became very excited once I saw its chart. Against the background of a toppy stock market, the weekly ...