Trading Short A Simple Yet Powerful Entry, Exit, and Stop Loss System For Taking Advantage Of Downward Trends 1
Congratulations! By learning this method you are one of the few who do, not the many who merely hope for something better. Congratulations on learning this simple, yet very powerful technique and I hope it brings you a better understanding of timing your entry in the market. We Need This Knowledge Now, More Than Ever. Knowing how to make money when the stock market is falling has never been more important than it is now. With the global economy in bad shape, the traditional buy and hold method of stock market investing simply does not work as well as it used to in fact it has cost some people their retirements and set others back many years. This is why you are doing a great thing getting educated on methods for making money in a downward market. The method outlined in this mini course, video and ebook has not been seen on any website or in any other course as far as I know. It is the result of back-testing the market, then trading the market and finding what works. And this method has had hands-down the best results of any other method tried. Even though it can be used as a stand-alone system, when combined with the Greatest Stock Market Idea, Ever and The Two Best Single Bar Entries And Exits, this shorting system can give you even more success and become even more powerful. I hope you enjoy it! 2
Shorting Stocks The Method Outlined Below are the simple steps to finding an entry signal when shorting the market. 1. An uptrend line must be present on a daily bar chart. 2. The uptrend line will have at least 2 troughs and preferably 3. 3. The uptrend line will be on a 45 degree angle or less. Here is what is meant by a 45 degree angle: So our trend line ideally is flatter than 45 degrees. 4. The bar that trades through the trend line (below it, giving us the signal) ideally closes on or near its lows for the day. If it doesn t we can wait for a bar to close on its lows before entering our trade. 5. Preferably there should be at least one lower peak present (lower than the very top) forming a zig-zag down. 3
Why We Want A Flatter Trend Line One of the top reasons traders fail when shorting the market is they try to short their stock at the very top of the market after it has just started to fall. Doing this can have adverse affects on your trading: for the reasons below. It tends to put the odds of probability against us. If we try to short a stock very near its top, we can be at higher risk of loss because: Traders and investors are not yet afraid, and still see any falls as a bargain, ready to snap up more stock as the price goes lower (and therefore keeping price up). There are still many technical support levels left when a market is near its top. These also prompt traders or investors to buy (therefore keeping prices up). From a market psychology or Behavioral Finance point of view, we want to be shorting a stock or market when people are running for the door. Using a flatter trend line when finding a short selling signal helps us find the stocks or markets where there is little support left, and traders and investors are starting to feel pain and fear in owning the stock. The more price falls after this, the more pain and fear they feel and the more likely they are to sell their holdings, pushing prices down further. The trend line is merely a line in the sand where the odds of probability now point to further falls. 4
Examples Of The Short Trading Method Here are examples of the short trading method, so you know what to look for. Figure 1: Example of a flat trend line and Short Selling Entry signal on WDC. 5
Figure 2: Example of a flat trend line and Short Selling Entry signal on WES notice the lower peak also. Figure 3: Example of a flat trend line and Short Selling Entry signal on UGL. 6
Exiting Your Trade Below are the simple steps to exiting your trade once it has evolved. 1. A downtrend line must be present on a daily bar chart. 2. Price will close above the downtrend line and the previous peak. 3. The bar that gives the signal will preferably close on or near its highs. Setting Your Initial Stop Loss Your initial Stop Loss is set using the same principle beyond the downtrend line and previous peak. Therefore we want our stop loss to be: 1. Set 1 cent above the previous peak (provided this is also above the downtrend line). The reason for this is that price will often find resistance at the downtrend line and at the previous peak. Setting our stop loss beyond both these levels will ensure we stay in the trade as long as the trade is still valid. If price does reach these levels, it is a very good indication that the trend has changed, and our trade is no longer correct. 7
Examples Of Exiting And Setting Our Stop Loss Figure 4: Example of a Short Selling entry, stop loss, and exit on SWM in 2008. Figure 5: Example of a Short Selling entry, stop loss, and exit on MYR in 2011. 8
Figure 6: Example of a Short Selling entry, stop loss level and exit on LEI in 2010. Figure 7: Example of a Short Selling entry, stop loss level and exit on IPL in 2008. 9
Will It Work Every Single Time? No nothing in the stock market works 100% of the time. We are aiming to get 60% wins or above, and to profit 2 or more times as much as we lose on average. As you back-test this method you will understand and appreciate this more. Now I Know The Method, How Can I Short The Market? There are many ways to short the market Short Selling shares, using Options (buying a Put Option or selling a Call Option) or using CFDs. Some providers that offer these tools include: 1. ComSec 2. Macquarie Prime 3. E*Trade 4. IG Markets 5. A full service broker like RBS Morgans 6. And many others For tools, I personally prefer to use Direct Market Access (DMA) CFDs when shorting as they track cent for cent the underlying security. Many CFD providers online trading platforms also allow you to queue trades even if you are away from your desk. There are many online brokers who offer DMA CFDs. You can check out stock trading forums and see if others have recommendations on the tools or broker that they use. 10
Back-Test Your Method While this method is simple, and it requires no fancy software or technical indicators or mathematical formulas, it is still essential that you practice it and ensure it works for you. To do this, test the theory over 10 or more years of market history. Record your trades mechanically and look at your results. You are aiming to get: 1. More than 60 to 70% for your win percentage 2. More than 2 to 1 Profit to Loss A great way to increase your win percentage is with the Greatest Stock Market Idea, Ever and The Two Best Single Bar Entries and Exits. These two courses will complement your knowledge and help take your trading to new levels. Once you have tested the method and found it works for you, use it live in the market with very small amounts of money to get used to pulling the trigger at the right times. When you are successful doing this, then use the portion of your trading account you are comfortable with. Please Enjoy Please enjoy, test and use this method, and keep it for your own private use. If you have any questions about the method, you can email me at dave@asxmarketwatch.com. I hope it allows you to take advantage of a market that no longer goes up all the time! Happy trending, Dave McLachlan 11
Legal Information The information in this ebook, video and course is for educational purposes and should not be interpreted as investment or trading advice or a financial recommendation of any kind. It is displayed with the intent to help readers make their own decisions in the stock market. It therefore follows that this material neither purports to be, nor is intended to be, advice to trade or to invest in any specific financial instrument or to use any particular methods of trading or investing. Readers should not act on the basis of any material found in this course without properly considering its applicability to their financial circumstances. If not qualified to do this for themselves, readers should seek professional advice. For personal advice regarding investing or your investments, please see a licensed Financial Planner, licensed Stock Broker, or Accountant. All care is taken with the information in this course, but it may contain errors which will be fixed when discovered. If you are relying on this information for investment decisions, you are advised to carry out your own checks of their accuracy. If errors are found, letting the owner know would be appreciated. The decision to invest or trade is for the reader, viewer or student alone. The author expressly disclaims all and any liability to any person, with respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance upon the whole or any part of the contents of this short course. Investing and trading involves risk of loss, past results are not necessarily indicative of future results, and Dave McLachlan is not a licensed investment adviser. 12