Tuesday, September 14, 2010

Need to Short

I received an email today which says "a trade which i did trying to act oversmart and that trade is costing me a huge loss.
I have shorted .... lots of nifty dec. 5700 call ....... As a result of which ... very huge loss which i cant bear."
Then, a comment (not published) on this blog " want to share some of the negative aspects that I have in me and I do not know how I can take out those negatives. I learned a bit of technical analysis not to that great length, but still I do not understand why I always favored shorting Nifty instead of buying it, I initiated shorts at 5605, 5690, and 5735, and did not understand what to do then I hedged by buying october 5768 and at the end of the day when I looked into charts there was no indication of nifty correcting and today instead of buying again I remained short. Can you please suggest and help me though I know the right thing why I keep on doing the wrong thing. Well I am from andhra pradesh and wanted to attend your certificate program....."

My Notes: On TV, I have stressed this point hundreds of times - short selling should be done only by professional investors.
Often, markets move into prices that appear irrational, and, probably are so. But so what? Keynes, said "Markets can remain irrational a lot longer than you and I can remain solvent". Sensible human beings understand that markets have bcome irrational. But, common sense is not always the correct approach in trading. Professional traders understand that they cannot short such markets because they do not know for how long this irrational behavior may continue. So they stay away.

My Suggestion: Novice traders should take only BUY trades. If such trades are not available stay away. In numerous Investor Camps which I did for CNBC, I have explained that buyers make more money than sellers because Stock market has a secular uptrend, thanks to economic growth. This does not mean blind buying, but it does suggest a bias in favor of owning stocks rather than shorting.

What should be done with short positions?
In case there is a short position in futures, I would suggest keeping a tight stop loss and exiting if that stop is hit. Thi is going to be painful, but losses have to be cut. Keeping a stop rather than exiting immediately has the advantage of keeping you in the trade if the market does begin a decline.
In another case, december calls have been sold short. Here, the investor has the advantage of time. Given enough time, this trade could actually be closed without any loss. But, there is the question of MTM +  psychological pressure day after day. Same suggestion. Keep a stop loss. Close part of your position if that stop is hit. Hold part of position till a correction comes in. Then exit immediately.

Reader opinions are welcome.

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