Friday, February 11, 2011

Recognizing short signals

I think it's important to learn how to short, even though you may not wish to do it. Most stock exchange would frown upon shorting and measures had been set up to prevent people from doing naked shorting. That's all well and understandable. However, I think for those who are always on the 'long' side, it's equally important to learn how to recognize short signals.

In the past, I'm more interested in looking out for buy signals because that's essentially what I do. I buy first and sell later. I don't sell first and buy later, which is essentially the meaning of shorting. That makes me very good at buying and finding the right entry. But to fully complete a trade, you must learn how to buy and to sell. I would say that there are so many books on teaching people how to get into a good entry but not many on how to sell properly. Of course, getting a good entry is half way there, but getting a good exit is the more important half. It's the half that determines whether you turn a profit into a loss. It's the half that makes a losing trade a winner too.

Anyone knows the link between this picture and this post?

But understanding when to short need not mean that you have to actually short it. In recognizing a short signal, you can either choose to short it, stay on the sides, sell your position or choose not to buy. I think choosing not to buy is the most important use of recognizing a short signal, especially for those who only do long trades. If you choose not to short upon seeing a short signal, the very least you can do is not to initiate a buy position. That is both sensible and financially rewarding, isn't it? Alternatively, you can choose to sell or trim your holdings knowing that the price will come down again. That's taking partial profits.

So, do not just concentrate on one side of the equation. Find out more about on shorting so that you can recognize a short signal when you see one. In that way, you can smell a change in the wind direction when it happens. Remember, just like seeing a buy signal doesn't mean that you have to buy it, seeing a short signal doesn't mean that you have to short it either. The more important use of recognizing such signals is to choose not to act 'oppositely' to it. If you see a buy signal, you do not short. If you see a short signal, you do not buy.

Knowing when to commit yourself to a trade can often be the lifesaver, rather than stop/cut loss. Prevention is better than cure yea?