I met Mike Illenberger over a year and a half ago over twitter and immediately admired his passion for helping other traders by providing trading education from experienced traders and by example. Now he has partnered up with Jason Matias, a like-minded entrepreneur and trader, to create a community for all traders to help each other learn and make money. They've recently launched their joint venture websites and asked me to "hang out" with them at wallstmaven.com/blog and answer a few questions that many traders ask.
I couldn't pass it up, so in a relaxed, friendly atmosphere we had a chat about trading psychology, which happens to be my favorite topic about trading, we had a good time chatting about the subject. Check it out for yourself here, and give kudos to those guys for their dedication to trader education and awareness.
Peace and Profits to all.
@stockaddict
Tuesday, January 24, 2012
Wednesday, January 11, 2012
Why is Shorting Risky?
I’ve been asked this question many times by mentees and by friends alike as soon as the topic of shorting stocks starts up. Why is shorting riskier than getting long? The answer is simple. If you are long a stock, you can only lose a maximum of 100% of your investment when a stock reaches $0, therefore capping your loss to the amount you allocated for that trade. However if you are short you can lose more than you allocated and the actual loss is unlimited since the stock can move up with no upper limit.
A chart is worth a thousand words, take a look at INHX on Jan 9, 2012. INHX gapped up 140% the morning of Jan 9, 2012. So if you were short that stock, you’ve lost all your allocated amount + 40% more of that amount from your overall account that you did not designate for this trade. On the other hand if INHX gapped down while you were long your loss would still be limited by the 0 lower limit of a stock price. I’ve never seen a stock gap down to 0 in my trading career, but have seen many stocks gap up more than 100%.
So that’s why shorting can be risky and has unlimited loss potential, which you don’t have when you’re long.
I also have to add that these kinds of over 100% jumps happen mostly with thinly traded/low float stocks, you will likely not see this happening with higher quality stocks in general. Shorting can be as safe as getting long in the heavy weight stocks, as long as you disciplined to get out when the exit lights come on.
Another question I'm asked often is do I personally short the market. Of course. It's a must have skill in every profitable trader's repertoire. However I don't always have short positions in my accounts, since I'm generally a swing trader, the trading environment has to support shorting in general, and of course each stock is different and some stocks are just asking for it. In general if the market is bearish my short/long ratio is much higher than if the market is bullish. The market dictates that for swings. This is a personal preference as I know traders who make a good living using mostly short strategies in any market conditions. The down moves are swift and large in magnitude when panic sets in, so it can be very lucrative when done right.
If you have any question on this or any other trading topic, send it to me and I'll answer it when possible.
I also have to add that these kinds of over 100% jumps happen mostly with thinly traded/low float stocks, you will likely not see this happening with higher quality stocks in general. Shorting can be as safe as getting long in the heavy weight stocks, as long as you disciplined to get out when the exit lights come on.
Another question I'm asked often is do I personally short the market. Of course. It's a must have skill in every profitable trader's repertoire. However I don't always have short positions in my accounts, since I'm generally a swing trader, the trading environment has to support shorting in general, and of course each stock is different and some stocks are just asking for it. In general if the market is bearish my short/long ratio is much higher than if the market is bullish. The market dictates that for swings. This is a personal preference as I know traders who make a good living using mostly short strategies in any market conditions. The down moves are swift and large in magnitude when panic sets in, so it can be very lucrative when done right.
If you have any question on this or any other trading topic, send it to me and I'll answer it when possible.
Peace and Profits to all
@stockaddict
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