Going Short on a Stock is the Fastest Way to Make Short Term Profits
(By Glenford S. Robinson)
If a stock trader wants to make a lot of money on a long-term basis, he must follow the strategy of Warren buffet. However, if a trader wants to make money consistently in the stock market, she must follow the strategy of the legendary short seller James Chinos. Throughout my career as a stock trader and a Forex currency trader, I have found that 99% of my long trades are losers because I elected to trade on a short-term basis. However, if I had made those same trades on the short side, I would have been a millionaire by now.
Therefore, the same criteria that I looked at when I decided to go long and lose, is the same criteria I will looked at when I want to go short, which is what I have elected to do. In fact, that approach has proven very profitable. Even when there isn’t much profit, the drawdown is much less than if the drawdown had happened on the long side.
My discovery explains the reason why most traders lose money in the stock market. Those losing traders just approach the market the wrong way. First, one must understand that what goes up must come down to some degree because profit has to be made by traders. However, what goes down doesn’t necessarily mean that it will come back up at all. That is because companies do run out of business, which cause their stock prices to plummet without recovery.
Look at General Electric stock (GE), this company and its stock has been around for a hundred years, but the last time I looked at the share price for GE, I notice that the stock was $7.00 per share. Wow! A stock that was once a juggernaut, trading at and above $30 per share is now a laughing stock. Look at sears, a former retail powerhouse that has been around for another hundred years, has suddenly gone belly-up. But, if you were on the short side trading those stocks, you would’ve benefited greatly from their slow share price decline.
The famous Warren buffet is a very rich trader/investors because he goes long on a stock and stays long on that stock forever. While my legendary role model James Chinos, uses the opposite approach; he short stock for a shorter time period and became very wealthy doing it. Such contrasting strategies can be explained by visiting the psychology of the trader. Psychological and emotional factors govern the mental processing of the trader’s action. Let me explain…
There are two emotions that govern the action of the trader. These emotions are fear and greed. Fear is the stronger of the two emotions. Investors scamper out of the market when they become afraid of unpredictable market conditions. That is why when a stock is rising higher the possibility of such stock plummeting at a moment’s notice is very high. The slightest of negative news will cause any high-flying stock to buckle at the knees at any moment. Such was the case with Veritone Inc., (VERI). The stock went from a high of $74.91 on September 25, 2017 to an astonishing low of $5.20 on November 12, 2018. I too lost money on this Veritone stock, but if that didn’t happen. I probably wouldn’t have written this article.
In fact, I lost money on this stock way before it got to its infamous low price of $5.20. I had gotten out of the stock when the stock was flying high and then fell to about $30 per share. Then I went back in again, thinking that the stock would rebound, but it did for a short while then resumed its downward spiral.
The beginning of the downward trend was the day when Cintron research sent out a negative tweet stating that investors who held position in the artificial intelligence stock Veritone was not intelligent at all. The stock immediately took a nose dive down the charts; within minutes, millions of dollars were lost, and the stock hasn’t recovered since.
A happy ending to our Veritone story would’ve been achieved if I had taken up a short position in the stock. I would’ve been a lot richer, but we live and we learn. Successful people usually lose first before they begin to win in life. Interview most successful people today and you will see that most of them lost battles and money in the beginning of their journey before they became successful and profitable.
So, if you are an aspiring trader and you are losing most of your trades, you are going through the beginning stages of success, which doesn’t seem as success, but in deed you are paying your tuition for the knowledge you are gaining when you are on the losing end of a trade. The lessen here is that you learn from those losses by taking notes are writing a log to yourself.
Be consistent with whatever strategy you use, so if the strategy you are using is a losing strategy, tweak it so it becomes a winning strategy. For example, I had created a strategy for going long. However, I always seem to end up on the losing side of the trade. So, I made a simple adjustment. I maintained the same formula of a long strategy, but instead of going long, I just go short. It is as simple as that.
Trading, educators always say, stick with your trading plan. Indeed, that is a very true and important statement. Stick with your trading plan especially when you are in a trade and even if your trade is not going as plan. Yes, cut your losses, so you can live to trade another day. If you are following a strategy day after day, look at the production trend. Is it profitable most of the time? If so, your strategy is successful. However, if your strategy loses most of the time, then it is time to tweak it slightly. You want your strategy to win most of the time. Your strategy will not win all the time, but a successful trading strategy will win most of the time.
And if you are a short-term trader, going short will give you more profits. Before deciding on any trade however, do the research, fundamental analysis and technical analysis is a must. According to Chinos, begin your research by first reviewing SEC filings, then proceed to review press releases, followed by visiting earnings calls coupled with other research. He said a short seller should work his or her way out because most people work their way in, (Business Insider, Lopez 2012).
Disclosure: I do not own shares in Veritone, GE, Sears, or any stock mentioned in this article.
Disclaimer: ©Mstardom, Inc., Mstardom.com, Mstardom Finance does not provide investment advice.
Jim Chanos does a lot of interviews, and when he does, he’s usually talking about things he’s doing – stocks he’s shorting, data he’s looking at, things he’s reading etc. Rarely, though, does he speak about how he does it all.
I am a Clinical Lab Scientist, entrepreneur, investor and trader (stocks and Forex). I enjoy writing and publishing articles online.