Page 248 - THE MARKET WHISPERER

244 PART 8 - Shorts: Profit From Price Drops

them for $3500, and now have to buy back for more, the process ends up
being sell low, buy high and a loss for me of $200.

Summary

When we expect a stock to rise, we can buy low and sell high. When we
expect a stock to drop, we still buy low and sell high but in reverse order:
first we sell high, then buy low. As you see, no one has yet come up with
a better way to make a profit other than the ancient method of buying
cheaply and selling at a higher price.

SMART The difference between a short and a long is the order of
MONEY actions. To execute a short, we start by selling, and end by
buying.

Are Shorts Riskier than Longs?

In light of the fact that stocks drop faster than they rise, shorts work
better and are faster and more reliable than longs: from my point of view,
intraday trading in shorts is less risky. The risk in shorts may ambush you
if and when you swing trade a short, holding it for days at a time, since
you can never know what the situation will be when you wake up. We
execute shorts on weak stocks. When a weak stock reverses, the effect of
the upward correction can be sharp. (Later we will learn about the “short
squeeze.”)

Another aspect is the potential for loss. If you are holding a long position,
the maximum potential for loss is the value of the stock. A stock worth
$20 can drop to $0, so the maximum loss is limited to $20 per share. By
contrast, when you hold a short, the potential for loss is unlimited since a
stock worth $20 can also rise to $200, or in theory, “to infinity.” This occurs
in very rare cases and your likelihood of ever experiencing such a situation
is very low, but it is definitely a risk that must be taken into consideration
and recognized.

Summary

During the day’s trading, shorts are not any more risky than longs. However,
if you choose to hold shorts for several trading days, they can definitely
become dangerous and will require a high level of skill and caution.

How long does a broker let you hold a short? This varies from one
broker to another. Some require closing shorts within three trading days,
while others set no limitations.