Episode 37: Jonk’s Guide to Short Selling, Part 2.

One of the most commonly requested topics from listeners of The Steady Trade Podcast has been about short selling. To offer a comprehensive overview, we’ve put together a multi-part miniseries on the art of short selling, covering the basics of what it is, important considerations, and how to get started. This is Part 2.

In Part 1, hosts Tim Bohen and Stephen Johnson talked about the basics: how short selling works, and to get started. In Part 2, they’ll begin to talk about deeper levels of understanding the potential risks and rewards of short selling.

The dangers of shorting. In the previous episode, Tim and Stephen began to discuss some of the dangers of shorting. Here, they expand on these dangers, but also discuss how to mitigate risk as a short seller.

How can we avoid the dangers of short selling? Tim and Stephen offer some anecdotal advice on how to avoid common pitfalls when short selling, including:

  • Be careful about when you sell short. Tim and Stephen discuss how important it is to be tactical about choosing the right moment for selling short. For example, why do most traders avoid short selling on the dreaded day one or two? Tim offers up his thoughts on why it used to be that day three was the best day for short selling, but that times have changed; both hosts offer their thoughts on timing and when exceptions apply.
  • Watch for the squeeze. As Stephen says, one of his biggest rules is that “when I’m in danger of a squeeze, I will have my finger full position on the cover button”. Tim and Stephen discuss the dreaded “squeeze” and signs to watch for to avoid being squeezed when short selling.
  • Don’t short low floats. As Stephen guesses, Tim’s biggest rule is to avoid a “float” less than $10 million. Basically, this comes down to an idea of inventory and supply and demand. They discuss why low float stocks are generally the worst choices for short selling.
  • Respect the risk. One failed short sell can be a career ender. As such, you must be respectful of the risk when short selling. Tim and Stephen offer specific examples of how to mitigate risk to the best of your abilities.

What are the advantages of selling short? Happily, short selling isn’t all risk and dire consequences. Tim and Stephen also discuss some of the benefits of short selling, including:

  • These chart patterns repeat over and over again. Short selling can reward traders who are able to identify patterns. After all, these sketchy stocks frequently repeat the same moves. So once you learn the setups, you can have a high success rate. As Tim often says, “history doesn’t repeat, but it rhymes”.
  • You can make money. Well, duh. With short selling, you can stand to make significant financial gains. Tim and Stephen discuss how this is one of the benefits, but how it does come with an inherent risk.
  • It’s easier to short these days. It used to be in salty veteran trader Tim’s day that finding shares to short was difficult. Now, it is a little easier to find shares to short. This is a mixed bag that can have advantages and disadvantages, but ultimately it’s a good thing if you are a trader who wants to get started with shorting.

What else to know before short selling. To round up the conversation, Tim and Stephen talk about several other considerations that can assist aspiring short sellers.

For instance, they discuss some patterns in short selling that they have seen over time and how you too can identify them as a trader. They also look at specific potential short selling trades and discuss how they would handle them and why. They also talk about trading psychology and specific tips for finding success as a short seller.

Moreover, if you want to become a short seller, you’ll need to put in a lot of research and become very educated on the market mechanics before you get started. By listening to this episode in conjunction with the prior episode, you’ll gain a much better understanding of the art of short selling so that you can move forward on your trading journey with greater confidence.

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