Is Any One Else Short Selling???

[bflbob]

As sort of a numbers geek, I've studied trading systems for a long time.

A few months ago, I discovered one that was pretty good at grabbing small trends for 15%+ gains.

It was initially targeting a lot of long positions, but recently has shifted to short positions, and they've been great. Here are some examples of recent trades I made:

• AA - shorted on 9/30 for $22.16, covered on 10/6 at $17.81, 19.63% gain
• BHI - shorted on 10/3 for $51.20, covered on 10/6 at $42.70, 16.60% gain
• NBR - shorted on 10/3 for $22.05, covered on 10/6 at $18.44, 16.37% gain
• GLW - shorted on 10/7 for $14.01, covered on 10/8 at $11.338, 19.07% gain

Obviously, not all have been home runs. I got pinned on a trade or two when the SEC stopped shorts on financial stocks. I also have gone long on a few that didn't work out, mainly due to the downtrend of the entire market.

I realize there is an unlimited risk due to potential huge price gains, but I limit myself to small positions (ala Van Tharp) to protect my account balance.

Still, I'm up in total account value by about 30% since 8/1/08 while most accounts are down by at least that percentage.

So what do you folks think? Is short trading too risky? Have I just been lucky, or has the recent downtrend warranted the risk?

 

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[slim_jim]

Hey, Tatanka......


Can't argue with "the trend is your friend".....

Have you back tested your system? Does it work in sideways markets?

 

[bflbob]

Well...I back tested the main concept for several months, and it tested well.

But, I've tweaked the original results in a way that I can't test with my software.

I think the tweaks have helped the results - tighter stops, longer runs, position sizing.

But since I can't back test with these tweaks, all I can do is a gut feel.

And...while the gut is pretty big...it feels pretty good.

I suffered by first down day in the last 10 days today, but it was small (.31%).
(I was long on some bank stocks that didn't do well. Might be the end of the short ban tonight.)

This is definately a short-term trading plan. I'm only in positions for a few days.

So far...so good.

 

[Edge]

Sounds like a pretty good system, just a few questions/comments:

Something obviously changed to start identifying short sale candidates, was that enabled through changes you made to your system because of a personal directional bias, or did the system automatically start identifying short candidates in the bear market and long candidates in a bull market? I’d say that if you system did that without your intervention than you’ve got an edge over a majority of traders.

I certainly wouldn’t sweat getting squeezed when the SEC implemented their rule changes, your system is in place to identify opportunity based on supply vs. demand activity the open market is displaying, that’s what you want.

As far as you question pertaining to luck, you are going to have to answer that based on your own backtesting since it is your proprietary system. It is a valid question since a lot of people have made fortunes recently just by shorting anything with a ticker symbol that wasn’t on the “short ban†list. But again, you should be encouraged if your system at least told you to be short. I would guess that since you said you tightened your stops there might of been a little bit of luck to get that type of return/trade. If the market wasn't going straight down, you probably would of been stopped out before you had a chance to run that far. But that is something that you can tweak to satisfy your own risk:reward.

So what do you folks think? Is short trading too risky?

Let me preface my answer by saying that I am almost always synthetically net short with my options positions. I’ve heard that line about it being more risky being short than long because over the long haul things trend up and you can theoretically have infinite losses with limited gains being short.

IMO that school of thought is pure BS!

The counter to that argument is that over the long haul when markets go up, they do so slowly, when they go down they go down faster. Simply put, markets don’t crash up, they crash down. Brian Shannon had a stat on his blog recently that I believe stated the average daily range in a bear market is 50% higher than the average daily range of a bull market. I can’t find the link so I can’t guarantee that I am quoting him correctly, but I’m pretty confident that I am close. There is no question about the fact that volatility fear gauges are higher in bear markets, just graph inverse relationship between the VIX and SPX for that.

The second point of my counter argument is that over the long haul, everything is priced correctly in free markets so there theoretically can’t be more risk on either the long vs. short side. Think about this, what we refer to as the stock market is the product of trillions of dollars of supply vs demand being played out freely, daily.

You are a numbers guy, combining my two counter arguments, how can it be possible that over the long haul there is more risk to either being short or long?

 

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[bflbob]

Something obviously changed to start identifying short sale candidates, was that enabled through changes you made to your system because of a personal directional bias, or did the system automatically start identifying short candidates in the bear market and long candidates in a bull market? I’d say that if you system did that without your intervention than you’ve got an edge over a majority of traders.

My system selects a list of stocks by running a formula-based report in MetaStock after EOD figures are in. It lists them as either short or long candidates -- never both. I use a 14 day average close (1 standard deviation) as a stop.

The only bias I put on it is to try to keep the blend of positions as balanced as possible between long and short positions. Lately, that hasn't been possible, since the only longs that have signalled are banks.

Today has been a bad day so far. All my short positions are showing gains this morning. And all my longs (banks) are down. I assume this is due to the ban on short sales being lifted.

I just was stopped out on MTB. I bought it on 9/22 for $88.00 and stopped out at $72.03. Good thing, since it is now down to $66.97. My original stop was $62.28, and I've moved it up over the past several days, so even though I lost on this one, it was below my original 1R risk.

I see the market has headed back into negative territory, so maybe my shorts will start to offset the bank long losses. Only time will tell.

I should also mention that I enter all my buys, shorts, stop losses and profit grabs (with trailing stops) at the end of each trade day. This means all my trades are by formula, not by emotion.

The only time I might jump in and stop the auto-pilot is if an "unusual occurance" happened. I did this when the ban on shorts took my from a decent gain to a major loss first thing in the morning. After the market quit over-reacting that morning, I reactivated my stops. One hit a stop loss. The other made me a good profit a few days later.

 

[MJ DeMarco]

I've had some luck in shorting stocks ... I agree with Edge, I perceive the risk to be less. When stocks go up, it is usually slow and methodical ... when they go down, they take fast, big hits.

The reasoning is pretty simple: Fear is a stronger motivator than greed -- short sellers make a lot of money in troubled times.

My biggest losses in the markets have always been on the long side vs short side.

I always pick troubled sectors as bad sector news usually drives down all stocks that reside in the sector. Ha Ha ... that pretty much is every sector in this market climate.

 

[bflbob]

I always pick troubled sectors as bad sector news usually drives down all stocks that reside in the sector. Ha Ha ... that pretty much is every sector in this market climate.

I have to agree with you there, MJ.

Only a few weeks ago, I was lucky to have 5 or 6 stocks show on my report (only S&P 500). Last night, there were 145 stocks to select from! Scary, but it sure makes it easy to identify a strong trend!

 

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[MJ DeMarco]

Good luck Bob, make lots of money and keep us updated!!!!

 

[bflbob]

Today was a definate down day for me, but not because of my short positions.

I started the day out holding three long positions (all financials).
I feared the end of the short-sale ban on financials might bite me today, and it did.

MTB -- Bought on 9/22 at $88.00 with original stop of $62.28 -- Out at $72.03 for a loss of 18.15%
MTG -- Bought on 9/25 at $7.90 with original stop of $4.99 -- Out at $5.015 for a loss of 36.53%
HBAN -- Bought on 10/7 at $10.27 with original stop of $6.86 -- Out at $6.892 for a loss of 32.89%

On the good side...
ASH -- Shorted on 10/1 at $29.21 -- Out at $24.30 for a gain of 16.81%

Overall, I made out far better than the market, since my account only closed down .81%, versus 7.62% for the S&P 500 as a whole.

One odd thing I noticed was that, until the last hour of trading, my shorts were mainly up in price. This makes me think that the bulk of the down was caused by financial shorts, not the market as a whole.

In looking at the short positions I have right now, half are up for the day, while the other half are down. (This counts after-hour trading.) This makes me question if we are near the bottom of this free-fall in the markets. This mornings futures, and other countries' markets might support this concept.

Any other opinions surrounding this?

 

[bflbob]

I've selected one new short position for tomorrow.

I put in an order to short TSS with a limit of $13.33.
It closed at $13.60, so this prevents me from getting into it if the declare bankruptcy overnight.

I started doing this after the big houses started collapsing.
Nothing worse than thinking you're shorting 100 shares of Lehman at $100/share...
...and waking up the next morning to find you've shorted 100 shares at $.72/share.

 

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[bflbob]

In looking at the short positions I have right now, half are up for the day, while the other half are down. (This counts after-hour trading.) This makes me question if we are near the bottom of this free-fall in the markets. This mornings futures, and other countries' markets might support this concept.

OK...so I was a little scared during the first few minutes of trading.

But as of now (10:25am), it looks like the market is calming a bit.

 

[cmartin371]

Great thread! I trade Currencies, so I just try and go where price is going. Keep us posted.

 

[AroundTheWorld]

Man I wish I knew more about the stock market. What a fun time to play.

 

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[bflbob]

Boy, what a wild ride today was! The Dow had a spread of over 1000 points from its high to its low. At one point, it was down nearly 700 points. At another, it was up over 300 points from yesterday's close. In the end, it was down a mild (comparatively) 128 points.

I closed only one short position today (I have no more longs):
AKAM -- Shorted on 10/3 at $15.64, closed position today at $12.864 for a 17.75% gain.

I shorted the position I spoke of last night (TSS) at $13.33 in the late afternoon. I'm glad I put the limit on it, since it opened at $11.82 and closed at $13.56. I could have been out $1.74/share, instead of the $.23 the limit forced.

I have placed orders for 3 more short positions for Tuesday (markets closed on Monday):

• ADI -- limit of $20.97
• ASH -- limit of $24.26
• TSN -- limit of $10.33

Overall, today was a good day for me. One problem I found was that my "tweaks" kept me from closing out a couple of positions I probably would have profited from:

• BRCM dropped to $13.52 from $16.03, passing my profit target of $13.63
• NSM dropped to $12.86 from $15.18, passing my profit target of $12.90

In order to add a trailing stop to my profit stops I either have to allow the profit to exceed 15% and then drop back to the trail, or go well past 15% and then stop out back at 15% or higher. I chose the second option. I use an 18% profit, with a 3% trailing stop.

So...even though the price went past 15%, it never hit 18%. Therefore, the stop never triggered. In my testing, I couldn't test the trail...only the 15% stop.

In all reality, if I had seen the profit hit 15%, I might have manually closed out the position. Unfortunately, work interupted.

As a whole, my account went up 1.29% today. Not bad when only 48% of my account is "in the market". The rest is sitting in cash, earning a healthy .15% per year!

So what do you think? Are we near the bottom?

 

[bflbob]

So what do you think? Are we near the bottom?

Oh boy does it ever SUCK to not follow your intuition!

Over the past couple of trading days, I posted that I sort of felt the bottom was near. But, I still followed my plan. And today, it cost me 5.64% of my account.

And worse of all, I made a mistake on Friday -- two actually...

I have placed orders for 3 more short positions for Tuesday (markets closed on Monday):

• ADI -- limit of $20.97
• ASH -- limit of $24.26
• TSN -- limit of $10.33

First...the markets weren't closed on Monday, as I thought they were.

Second...I only should have taken two positions, not three. Brain fart!

Now for the good part...sort of.

• ADI -- Shorted at $22.15 -- 5% over limit
• ASH -- Shorted at $26.31 -- 8% over limit
• TSN -- Shorted at $11.20 -- 8% over limit

They closed at $24.02, $28.13 and $11.61 respectively, so I lost money on each trade, but not as much as if the market had started low and gained.

I'm doing my best to keep the emotion out of this, so I'm not covering these yet. I just set my new stops.

One last note...I do have "room" to short a new position, but no new positions showed on my report. Another sign that the market has reversed. And, since I'm not able to take a position, a sign my system is protecting me.

 

[bflbob]

There isn't much to say about today. It started out scary (for me) with a continued uptrend in the market -- hence a downtrend for my account.

But as the day went on, the markets went back into the red. In the end, I gained back well over 60% of what I lost yesterday.

Like yesterday, nothing stopped out -- either for profit or protection. EXPE did get close at a low of $11.34. My first target is $11.23 for that stock.

I'm also short on INTC (Intel), which just announced they beat earnings. But two things are in my favor...even though it is up in after-hours trading, it isn't through the roof, and my stop is still quite a long ways away. The second is that, although it beat earnings, it disappointed on sales. That might keep it from climbing too much.

Overall, I was up a net of 3.67% in my account today. Not bad for a sort of flat day on the market (compared to the recent activity).

 

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[bflbob]

I'm doing my best to keep the emotion out of this, so I'm not covering these yet. I just set my new stops.

Oh, boy! Am I glad I kept the emotion out of it!

Today was, without a doubt, the best market day I have ever had.

I know...not the news those of you with IRA's, SEP's or 401(k)'s want to hear, but it worked great for me today.

I was busy getting out our company's ESOP statements and 5500's today, so I just let the trading run on autopilot. Three key things happened today:

1. I closed out my short position of NSM. I shorted it on 10/7/08 -- the day before I started this thread -- for $15.18. I covered it today at $12.577 for a gain of 17.15% in 8 days.
2. I have my first carry-over trade. EXPE is showing a gain of over 18% for me. Normally, I would have covered my position at the end of the day, within the last 5 minutes of trading. Too much can happen overnight. But, I was hard at work. We'll see what comes of this in the morning.
3. Every single position I hold, most of which were in the red on Monday, are in the black tonight. 75% of them are now showing gains of over 10% since I shorted them. A very big shift, just by sticking to my plan.

Overall, my account is up 7.33% for the day. Since I started this new system -- less than three months ago -- I'm up nearly 40% in account value. I hate to count my chickens before they're nuggets, but things are looking good.

There was finally a new LONG position that showed on my report -- ZION. The bad news is that I can't trade it.

As I show more profit on open positions, my risk on those positions actually increases, since I've got a larger potential drop before it hits my stop loss. So, until a couple more positions close, I'm locked out.

 

[slim_jim]

Tatanka,

Please keep us posted.

 

[bflbob]

I'm off to a dinner meeting, so this will be short and sweet.

My account is down 2.18% today -- not so good.

Closed out two positions:

• EXPE - Shorted on 10/9 for $13.21 -- covered at $10.858 for 17.8% gain
• BRCM - Shorted on 10/6 for $16.03 -- covered at $13.369 for 16.6% gain

Placed orders for four new positions for morning:

• GE - Short at a limit of $19.49
• NVLS - Short at a limit of $14.93
• QLGC - Short at a limit of $12.70
• R - Short at a limit of $45.60

Will update tomorrow!

 

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[bflbob]

Sorry...I got busy yesterday.

Monday was a bad day for me, since the market climbed about 400 points.

I ended up down about 3.5% for the day.

No positions closed, but I entered several new ones.

• GE -- Shorted at $19.49 -- right at my limit (prior post)
• NVLS -- Shorted at $14.97 -- .04 better than my limit
• QLGC -- Shorted at $12.73 -- .03 better than my limit
• R -- Shorted at $45.81 -- .21 better than my limit

I put in one new order for this morning:

• DHR -- Short at a limit of $55.86 -- filled at $56.66 -- .80 better than my limit

Later...

 

[bflbob]

Another uneventful day today.

My account ended up increasing by 3.39% today, which made up for most of yesterday's fall.

No new orders for tomorrow, so it is a 'wait and see' day.

 

[MJ DeMarco]

Bob, what is your goal with the short selling? Are you doing it until you feel the market turns around or is this a new found passion and career? Sounds like you are having a lot of fun!

 

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[bflbob]

Bob, what is your goal with the short selling? Are you doing it until you feel the market turns around or is this a new found passion and career? Sounds like you are having a lot of fun!

Hey MJ!

Actually, I'd like to be long in positions rather than short. Only one problem with that. Nothing is showing up on my radar for a long position right now.

The report I run each night showed 197 short opportunities last night, and ZERO long ones. Nothing is trending up right now in any meaningful way.

Obviously today isn't looking much brighter either.

Even when we have a good day or two, it doesn't develop a trend. It might, if I were day trading, which I'm not. I'm usually looking for a trade to cycle in about 2 to 15 days.

Some day the trend will turn...

 

[bflbob]

Today was the second best day I've had since I started trading this new system.

Every position I'm holding now is a short position, and they all moved down today.

I managed to close out one position:

• R -- Sold short on Friday at $45.81, covered today at $37.90 for a 17.27% gain.

As I think I mentioned before, when my account goes in my favor, my risk actually goes up. This is because I'm now further from my Stop Loss prices. Because of this, even though my account went up 4.72% today, I don't have enough in my Risk Pool to short anything else.

Both the CFO and CEO of our company think I'm nuts for shorting. They keep calling it gambling. But I'm up around 45% in the last few months due to following this system. Part of the system is managing risk, and position sizing. So, for now anyway, it is a gamble I'm willing to take.

I actually had a second stock that crossed my 15% profit line, but that occured with about 45 minutes left in the trade day. By the time the day ended, it had crossed back over to around 13%, so I missed locking it in.

On the good side, the Ryder (R) trade above would normally have tripped at $38.51, after it hit a low of $37.38 and then reversed 3%. By watching the reversal occur near the end of the day, I was able to get out at $37.90 manually.

One thing I'm noticing is that as my number of positions rise, it is getting increasingly difficult to watch them efficiently toward the end of the trade day. This is especially true if several are near a trigger point.

I don't anticipate this to be a problem forever, since in my testing I seldom had 20 stocks to pick from, let alone the nearly 200 that I'm seeing now. Once the market starts to stabilize, things should get better.

 

[Jonleehacker]

Way to go Bob!

You're a good guy, and you deserve it.

I am a big fan of Van Tharp and "The Way of the Turtle" and it's cool to see you putting a system like this into action.

 

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[bflbob]

I am a big fan of Van Tharp and "The Way of the Turtle" and it's cool to see you putting a system like this into action.

I'll have to agree. His stuff is tops!

On to today...

Some interesting stuff. At one point (mid-afternoon) I thought I was going to hit profit stops on the bulk of my positions. I had 7 of my 10 positions showing gains of 11-16%. As I said...at one point.

Within a very short time, the market reversed, shooting up nearly 500 points from where my "Happy Day" was left standing by the side of the road. I was up nearly 3%, and it disappeared.

The good news it that I was still up on a plus market day!

I made a whooping $.49!:banana::great::smxA:

Is this the Fastlane or what!!!

Here's the other neat thing. I get to short a position tomorrow. Yesterday, I couldn't. Today, I can.

The difference is the risk I have left on the table. Even though my account only changed $.49, my stops all moved up, due to the down trend of the market recently. This tightening of stops reduced the risk in my Risk Pool, allowing for another position.

And here's the neat thing...I get to Short it on an "up" day, where my selling price (in theory) should be higher.

It was kind of interesting to see what changes there were in my account on a flat day (profit-wise).

Here's my pick. The order is placed for a morning trade:

• VRSN -- Short with a limit of $19.77 (closed at $20.17)

One other thing I noticed today. Even though the market was up, 6 of my 10 positions dropped in price. That indicates that I'm still picking good Shorts. Right now, all 10 of the positions are on the profit side, which is another good indicator.

 

[bflbob]

Great morning...ok afternoon...good day.

That sums up today's market for me.

With all the bad news on futures this morning, I had already ordered my Lambo. The day did start out good, with me closing 3 positions within the first half-hour. But then the market started to recover.

I managed to squeeze out one more position close before 11:00, and then I was done for the day. With one exception...

VRSN -- Short with a limit of $19.77 (closed at $20.17)

VRSN started below my limit, drifted lower, and then finally came up just before lunch. I ended up taking a short position at $19.77 -- right at my limit. At the end of the day, it closed at $19.60, giving me a small gain. Without my limit, I might have ended up shorting at $18.60 and losing 5% on the day for it. I'm liking those short limits!

My position closes for the day were as follows:

• ADI -- Shorted on 10/13 at $22.15 -- covered at $18.64 for a 15.85% gain in 11 days
• ASH -- Shorted on 10/13 at $26.31 -- covered at $21.77 for a 17.26% gain in 11 days
• INTC -- Shorted on 10/9 at $16.70 -- covered at $13.76 for a 17.60% gain in 15 days
• AMAT -- Shorted on 10/9 at $12.85 -- covered at $10.84 for a 15.64% gain in 15 days

I have room in my Risk Pool for 4 more positions. Due to the limits I put in place, I'm placing 5 orders for Monday, with the intention of cancelling the last after 4 are filled.

Here are Monday's orders:

• ADM -- Short with $17.18 limit
• BMC -- Short with $22.53 limit
• JNPR -- Short with $16.17 limit
• PEG -- Short with $27.09 limit
• SWN -- Short with $26.57 limit

Overall, I was up in total account value by 2.93% for the day.

Of the entire S&P 500, 317 stocks showed up on my list today...SCARY! Not one was long.

 

[MJ DeMarco]

Thx for all the updates Bob, I am enjoying reading-up on your trades.

 

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[bflbob]

Thx for all the updates Bob, I am enjoying reading-up on your trades.

Thanks MJ!:thankyousign:

Hard to tell if people are out there sometimes...

 

[bflbob]

I think I know where retired weathermen go...

This morning, as last week, the futures were looking WAY down. Everything indicated that the market would tank big-time today. Not quite reality.

In fact, other than a short time this morning, the market was up most of the day. I got lucky, as TSN closed this morning at the largest percentage gain I've hit so far. Then the market turned up. It stayed up most of the day, until just before the close, when it tanked. But "only" 200 points. Nothing like what we are seeing overseas.

The market increase actually helped me too. I shorted my four positions early on in the day, and they sold above my limits (except one). Unfortunately, they started to climb in price, which isn't good when you are shorting!

Here is how my Friday-booked trades entered the market:

• ADM -- Shorted at $17.32 -- $.14 over limit
• BMC -- Shorted at $22.53 -- $.09 over limit
• JNPR -- Shorted at $16.55 -- $.38 over limit
• SWN -- Shorted at $26.57 -- right at limit

I closed out two positions:

• TSN -- Shorted on 10/13 at $11.20 -- covered at $8.918 for a 20.38% gain in 14 days
• QLGC -- Shorted on 10/17 at $12.73 -- covered at $10.82 for a 15.00% gain in 10 days

I have room in the Risk Pool for one more position, which I have entered for morning:

• EIX -- Short with limit of $30.52

Overall, my account was up 1.68% today.

Seven more stocks hit my report today, for a total of 324 -- all showing short signals.