The Differences Between Buying Long and Selling Short
Stocks move upward in fairly typical patterns that
occasionally alternate and shift from Stairstep to Peaks and Valleys
Candlestick Patterns for instance. But the sell side of the market can often
drop like a dead weight. An uptrend looks like a gentle slope upward until the
peak which is often more steep, but the downside frequently looks like a sheer
cliff. Stocks will plummet far faster than they rise. This makes Selling
Short more profitable in the short run, but also much riskier because of
the momentum behind the runs.
It usually takes a novice trader about twice as long to
learn to Sell Short, as it does to learn how to buy long. For Long-Term
Investors who have been taught that Selling Short is “bad” for the
market, the length of time can be even longer.
Selling Short
is not bad for the market. It is actually a good thing. If you were to look at
a stock chart of the Dow 30 Industrial Average since it began over 100 years
ago, you would see that during all that time the trend has been up.
Intermittently, there have been brief periods where the market moved down, but
it always returns to moving up. The periods where it moves down are correction
phases that are necessary to sustain the long term uptrend. These corrections
adjust the Angle of Ascent™ of the market uptrend keeping it stable and
sustainable. Without them, the market could not sustain a very long upward
move.
Selling Short has been around since the earliest days of the Stock Market. It is not something new but something that is an integral part of the Stock Market, and it provides a means of making money during the normal and necessary Market Corrections.
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The market corrects because prices become speculative, and
no longer represent the true value of the stock in relation to its company’s
growth potential. As the price falls, the value of the company and the value of
the stock come back into sync or harmony.
Many traders enjoy the fast paced atmosphere of Selling
Short, but some of the basic rules of trading are different for the sell side
of the market. One thing that has changed recently is that there is no longer
an Uptick Rule. This rule had been enacted after the market collapse of 1929 as
a means of controlling Selling Short, to keep it from causing market
collapses. In recent years with the advent of computer programs that initiate
curbs, trading is halted on a stock that is too speculative. The Securities and
Exchange Commission SEC deemed the Uptick Rule no longer necessary, and after
two years of testing it was eliminated.
Some of the differences between Buying Long and Selling
Short are the following:
1. You will see more stocks dropping on lower Volume, and
stocks dropping day after day in a momentum run down. If you look at charts you
will see that the upside is gradual and that the down side is much steeper.
This is one of the reasons Downtrending markets last a short period of time,
while Uptrending markets last for long periods of time. Most traders are simply
more comfortable with the long side and holding as a stock moves up, and to
them Selling Short may seem weird and confusing.
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2. What makes markets surge or move upward is energy,
enthusiasm, and buyers. What makes stocks drop is uncertainty, indifference,
despair, and panic. Stocks run up because of energy. Stocks can drop due to
lack of energy. a dull market is at risk of dropping from its own weight of
indifference. Stocks do not always need bad news to drop. They can drop because
of a lack of interest.
3. Weak support will collapse without much effort. Moderate
support will buckle if the stock has bad fundamentals or is in a weaker sector.
Strong support will hold for the most part when the market is not in a Great
Bear Market.
Summary
Corrections in the market adjust to overextended patterns in
sectors, which have been over heated and running too long on the overbought
side.
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Education." Go to the Learning Center and watch a wide variety of
webinars, to experience for yourself the excellence of TechniTrader
education.
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Trade Wisely,
Martha Stokes CMT
Chartered Market Technician
Instructor and Developer of TechniTrader® Stock and Option Courses
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