Wednesday, September 10, 2008

6 Rules for Short Selling - Bear Market

Making money in the stock market is a probability game. So we need to look for opportunities which increases our probability of success in making money from Mr Market.

A review of the 6 rules in William O'Neil's book on How to Make Money Selling Stocks Short might help increase our probability of success in short selling using CFD:
  1. Short sell only in early period of Bear Market. Short selling in late period is dangerous as market can reverse suddenly. Short selling in Bull Market does not offer high probability of success.
  2. Stocks should be relatively liquid with an average daily traded volume of 1 million or more shares. If you short illiquid stocks, you might get short squeezed when market reverse suddenly.
  3. Stocks which are market leaders in Bull Market are potentially good candidates.
  4. Stocks with Head and Shoulder chart patterns or where 50dma cuts below 200dma are good candidates.
  5. Take profits often, target 20%-30%.
  6. Cut losses quick, cover stops at 4% above short price.

Shorting is a more delicate and disciplined game where you don't want to get burned.

Tomorrow, I'll attending a seminar on short selling, see if I can learn more!

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