Many people avoid selling stocks short because so many analysts and experts warn against it. In truth, selling stocks short has the potential to be very risky. But this is only a potential. If you take the proper precautions, the level of risk is indistinguishable from the risk of traditional long positions. Here are a couple tips to help you keep the risk of ruin that you face to a bare minimum.
The experts say that you should avoid selling stocks short because the market has an overall upward trend of about 3 percent per year. This is only an average of all the publicly traded companies out there. Many companies rise in value, but not all. Remember, we are looking at a composite of all companies out there and taking an average. You shouldn’t expect every stock in your portfolio to go up in value; nobody can pick that many winners at once. Some stocks go up, some go down. This is the reality of the market. If you are a skilled analyst yourself, you will be able to easily determine which companies stand the best chance of going down in value.
Even with this information, you don’t short a position as a long-term investment. Short selling is more about capturing quick profits; at the longest, you will only keep a short position open for a couple weeks using Tom’s EA. Even this is stretching things.
The last tip is to plug in some safeguards to your trading. You will want to evaluate a realistic exit price in both directions and be prepared to stick to those prices. Purchasing a stop-loss point is relatively cheap with most brokers—this is something you need to take advantage of.