This shorting strategy I am going to show you is my favourite. I called it the Ultimate Smash Bar Short – almost the mirror opposite of the long system I discussed here.
It can lead to some truly stunning price moves, has high accuracy and resulting R multiples can be large.
However, as a guy who shies away from shorting, it’s one I no longer use all that much.
I’m the type of person who doesn’t like anything going to waste, and so I give this to you, the reader, in the hope you can make it part of your trading.
Shorting opportunities abound
Despite my aversion to shorting (I’ll explain why another time), trading from the bear side can be a very lucrative business.
The best R multiples I’ve had were on the short side and were all achieved in record time.
All it takes is three solid days of down red candles, and your P&L for the whole month starts to look quite respectable.
Foreign exchange and commodities in particular lead to great shorts.
So what is the Ultimate Smash Bar short?
I was asked recently if it’s ok to use bullish bars when going short.
I answered, hell ya, the more bullish looking the bar the better the potential short.
You see, the markets always out to hurt as many as they can. They simply do not move very much if they’re not hurting someone.
Traders pile in on the bull side, so when the market does a 180 it leaves them exposed.
Many refuse to take a small loss, so end up taking a whopper.
That’s why reversals, fakeys, and aggressive outside bars (my term, I’ll explain it in a future post) are some of the best setups there are.
The USB is also a reversal pattern. For all its fancy name though it’s really just a blue bullish hammer – that gets smashed.
The ‘smash’ is a term taken from a strategy in Long Term Secrets to Short Term Trading, and it’s ultimate because I tweaked the original pattern.
Call it what you will though, its really just shorting the low of a bullish hammer.
Ultimate Smash Bar Shorting Strategy Rules
- The bar must be blue
- Bar must be at the 10 bar SMA or below
- Close must be in the upper quarter of the bar range
- Must have a real body in the upper half of the bar range
- Place a sell stop order two pips below the low
- Place stop loss at high of the bar
- If not triggered by close of next bar then cancel
Touching the moving average
The main difference between the long version and the short is the use of a simple moving average as a filter.
I like to use a 10 bar SMA, but I’m sure a 15 bar or 20 bar would yield similar results.
I’ve found trading counter-trend when going long isn’t such a big deal – provided you are using the right strategy of course.
But trying to fade strong uptrends can be problematic. Which is why for shorts I would use a filter.
The filter is the 10 bar SMA and there is only two requirements for a short setup.
The pattern must be at or below the SMA.
Below the SMA is easy. The pattern must be trading underneath the SMA as seen in the USD/CHF. Straight forward.
In the soybeans example, the blue bar is below the SMA but is also touching or tagging it ever so slightly. Tags of the SMA lead to the best returns.
View the 10 bar SMA as a resistance line, the price comes up to touch it but cannot breakthrough. The subsequent decline is hard and fast.
In the gold example, we have the one I like best. It’s clearly bullish.
First off its a bullish hammer, but its also sitting above the SMA, and closes firmly above it.
The bulls are reading the tea leaves, wave counts, or chart patterns expecting the market to move higher. Of course it does the opposite.
I have found USB longs and shorts to be among the best setups in the market. For the life of me, I can’t understand why this type of thing isn’t discussed more in trading circles.
Anyway, as a reader of Tradeneophytes.com, my goal is to give you all the setups I’ve tested, used or developed over the years.
If you follow the rules you will make money. But the hardest part is following them. All sorts of psychological issues crop up when money is on the line.
Which is why in the next few posts I’m going to devote to certain aspects of trading psychology.