The title is “Why Short Trades”, because in the process of crunching data and looking at outcomes, a very simple concept was clearly identified. I have always known it was factual, but now when I sliced and diced everything out, I actually saw how it was driven by the individual traders. We have always heard that short trades manifest themselves more quickly than long trades. Well, generally, that is true. Ever wonder why? If you have, here is why.
I have spoken before on how emotions effect the market. Some of you blew it off and others took notice. The latter group was the most astute in doing so, for emotion has a dramatic impact on the market. That emotion explains why short trades move faster than long trades. That also explains why I love going short. For quick day trades, shorts are your best bet. But then in a highly bullish market they may not be that readily available. Lately, the market has been giving us a lot of opportunity to make money with short plays. If you are trading futures, you already have a margin account so you are ready to go.
If you are only interested in buying and holding this information will still have value to you. However, in your case it will not be for making trades but for exiting them. So if you are a investor or swing trader do not go away. Here is the story by way of an example.
Joe Jumpstart loves playing the futures. When things are going smoothly he is happy to just hang in. But when the going gets rough and prices start to drop he is the first to pull the plug and sells his position. He and others like him will cause increased volume to the downside as the fear of loss causes them to exit and as those still in position see this, they follow the lead. It has a snow ball effect. Why? Fear! The more that sell the higher the fear factor and the more that will sell causing price to drop very rapidly.
So how does this make you money? Simple, take advantage of the fear. If you hold a position exit, for twice of what you hold. If not, short a position and ride it until it first starts to make a break in the move. If you are trading a 15 min chart perhaps a two or three candle retrace on the 5 min chart will be enough for you to exit your short position. Yes, you might miss some of the move, but then you will not get whipped sawed at the bottom when the rest the crowd is trying to recover their losses by playing the retrace. It is like eating a watermelon, the center is the sweetest and that is what you want, the middle of the move. Think about the time you exited a position and watched price keep going down and you were relieved that you did not stay in. But the fact is, you lost money by not just reversing your position. You even have a tab on the top of your charts to do that. One click and you are in short.
The inverse of this is a long move where there is an absence of fear, but it is replaced by greed. That often causes traders to lose money because they get in at the wrong time. There is not that fear of loss that is pushing the move only the greed of wanting to catch the move. Fear is stronger than greed. And since you do not have the larger volume to drive it, it will normally be much shorter in duration. If your timing is not incredible good, you will be whipped sawed when it flips over. Avoid chasing price as you will generally get stung.
Now, a caveat. I do not recommend this type of trading on a regular basis. Your trading should be based on sound principles and a good trading plan. But occasionally you will be presented a unique opportunity to catch some of these moves. Just be cautious and do not push an entry. If you were there in time and read the move early enough you will probably be ok, but trying to push it when it is too late in the move will be disastrous, do not do it. It will take some practice and skills to get a really good read on the condition of the move, but that will come with experience. Just knowing the possibilities, will have you looking for them and that is never a bad thing.
If you want to investigate learning how to get in on those moves, you must become very good at reading price. Many of these moves happen much too fast to rely on any indicator or trading tool. I am developing a trade trigger for the auto system that will be dedicated to fast moves and quick exits and works on price alone. It is early in the game. I did some testing with it on Friday and the results are promising but not yet ready for prime time. More on that later.
I have been doing a lot of scripting lately working on some new ideas. One idea is auto trading. Trying to get everything to work and still play in the TOS playground is sometimes challenging. On Monday, I will be conferencing with the ThinkOrSwim people who are regarded as informed in the areas that I will be investigating. By sharing screens we can get more information presented in shorter periods of time. I sometimes do the same when I am providing support for my own studies and they cannot be answered with a simple email or phone call. So, the outcome should be interesting and I am really looking forward to our appointment. More on that later.
See you on the other side,