Get Shorty
He-he-hey! Tell you what, I’m six foot four, and I love being short!
That’s why I prefer spread betting to investing. As a rule of thumb, investors lose money in a falling market, but for us traders it’s 3 oranges in a line, Kerching!

A recent newspaper headline read “Private investors steer clear of volatile markets.” Last quarter there was a net outflow of £600 million from equity funds, and not at the top of the market I’ll bet!

Someone once worked out that equity prices fall 3 times faster than they rise yet, despite this, stats show that spread betters still go long of equities and commodities more often than they go short. Don’t let’s run away from the action, let’s party on down.
For newbies wondering what all the fuss is about why not give the tutorial on shorting the once over. Don’t worry, shorting doesn’t involve surgery, it’s a cunning little ploy where investors sell something with the aim of buying it back again at a lower price. Straightforward? If not, check out the tutorial.

Avoid The Falling Knives
Let’s start with the basic rule of technical analysis. The safest way to trade is with your very good friend the trend. But the thing is, your mate the trend likes a change of scenery. He’s not always heading in the same direction, sometimes up, sometimes down. Check out the chart below:

Only trading the uptrend, but not the down, just isn’t firing on all cylinders. It’s a bit like Wayne Rooney saying, “ I’m only going to shoot with my left foot.” During bear markets many investors waste valuable time and money trying to call the bottom of the market (traders refer to it as catching falling knives, on account of the risks involved); far better to join in the conga with the other short guys.

All In The Mind
It seems that generally we have a problem with being short, and I’m not just talking about chippie little ginger-haired Scotsmen here. There seems to be a psychological problem with selling something we don’t own (unless you live in Peckham). This is where we need to take a leaf out of the forex guys’ book. They’re quite happy shorting a currency coz they can think of it as buying something else. For example selling EURUSD is selling Euros but buying US Dollars. Here’s another way of thinking of it: Remember the clamour to get hold of a spanking new X-Box 360 when a shipment went AWOL somewhere near the Bermuda Triangle? Your brother was one of the lucky ones, but he was away at Uni for another month. You decide to sell his X-Box at a sky-high price on e-Bay coz you reckon you’ll be able to pick up a cheaper one before he returns. Hey, that’s shorting!

So, When Does Opportunity Come Knocking?
It’s not too different to life on the long side; some traders will short a stock because they reckon its price is too high, some will trade news/rumours, others will base their trading solely on technical analysis or some pick n mix selection of the lot. Now I’m always banging on about how hard it is to trade news flow and rumours because private investors are bottom of the food chain when it comes to these useful titbits. But there are still cases when the news/rumour is on such a scale that you can still jump aboard the good ship Titanic and profit from the sinking vessel. Take Northern Rock (“please,” says Alistair Darling); in the fourth quarter of 2007 this was the most heavily traded stock on paddypowertrader, so those who shorted it must have had a damn good Christmas.

Another shorting strategy is to copy the boy scouts and be prepared. Being aware of company earnings reports and what the market expects (try using our Trades With Legs articles) gives the opportunity to short a stock that failed to meet expectations.

The Dark Arts Can Help
Don’t worry, forests have been destroyed and libraries built to cope with this subject and I’m not about to compete with that. There are masses of different signals for going short, including double and triple tops, reversal candlestick patterns and the old favourite head and shoulders formation that I’ve pointed out this month for the Dow and GBPJPY.

Not Short Of Choice
There’s far more to going short than just an outright sell of the market, but if the brain’s already on information overload feel free to skip this bit. Shorting can also be used to offset another position. For example, you might feel that Friends Provident are set to benefit from some bid interest, but you’re concerned that the overall market is looking about as stable as Amy Winehouse. So you can balance a long spread bet in Friends Provident with a short spread bet on the FTSE.

Another variation is pairs trading, which has nothing to do with hiring Jordan’s buoyancy aids. Pairs trading is betting on one share doing better than another by placing a sell spread bet on one share and a buy bet on the other. Traders chart different pairs and open trades when the prices get to extreme levels. They also bet on how they think the two shares will perform in future, based on some news or rumour. Remember, for example, when rumours of BHP Billiton buying out RTZ first emerged? At that point traders might have sold BHP Billiton and bought RTZ, reckoning that as the ‘target’ RTZ would perform better.

Don’t Get Caught Short
Just like trading on the long side, think about where to place your stop loss. Often stocks recover slowly, giving sly hints that they’ll return to your sell level but not quite getting there, whilst reaching just a bit higher each time (Yeah, we’re talking personal experience here). Decide on the stop loss before you trade and if it gets hit just kick the cat and move on to the next trade-there’s always another one out there.

Google Up An Example
In true Blue Peter style, here’s one I prepared, and traded, earlier though, on reflection, the big bucks were made before I even sat at the table.

The chart shows two excellent opportunities to short Google; even my less dramatic demo-trade put a pretend £500 in my back pocket.

So lets get like the guy below and enjoy being short.