My Fear Of Going Short

Going Short

One of the benefits of CFD trading is going ‘short’.  Brokers are always touting its benefits. And there’s always an army of fresh new traders short the pants out of one market or other.

For beginners at least there seems to be something rather cool about it.

The best (and quickest) money I ever made was on the short side.

Still, most of the money I ever lost was on that side too.

What gives? Why is that?

In this post, I’ll tell of you of my aversion to shorting and how it came to be.

 

Jinxed on the short side

I’m very superstitious when it comes to trading.

Holding beliefs like I always lose the first time I trade a new market. Or I always lose the first time I try a new system.

I rarely make money on Mondays. And I can reverse a whole bear market the minute I put on a short.

Ok, maybe a slight exaggeration.

But if you were to see my results over the past 17 years, you’d see short losses dwarf long ones.

 

Trading stock indices

To understand my wariness of the bear side, you need to understand my preference for stock indices.

They lack the intraday volatility of forex. Or at least that’s what I have noticed.

One of my worst trading traits is my addiction to the trading screen.

I figured out early that day trading wasn’t my thing, yet I still feel compelled to the near-constant watching of my trading positions (I have got better over the years).

With forex I’d get frustrated as hell, seeing early profitable trades suddenly reverse not long after they began.

I’d be up 100 pips soon after the London open, only to be back at break-even come lunchtime.

This type of price action is fairly common with currencies.

But with indices, ah yes,  it’s like relaxing on a tropical beach in comparison.

Indices, for the most part, don’t show this bipolar type action.

Instead, they tend to work out pretty quickly (if there going to work). And slowly build on those gains.

Whether trending upwards or going sideways, the long side of stock index trading has always been easy for me.

So, in the end, I just quit forex completely. I seemed to show little aptitude for it.

For years, my staple markets were the Dow, NDX,  FTSE, and Eurostoxx 50.

 

Shorting indices

All was fine when things were bullish.

But things weren’t so great on the bear side.

Too often I’d take a short bet and almost straight away I’d hear that infuriating beep sound blasting from my PC.

You know, the one that notifies you when you’re being stopped out.

The more I enjoyed my longs, the worse my shorts became.

The smart thing to do would have been to quit the short side altogether.

But heh, I’ve never been a smart trader. It can take me years for certain concepts to sink in.

Plus if I stopped shorting,  what would happen in a prolonged bear market?

Sometimes I’d hit pay dirt – like in the flash crash of 2010, and the taper tantrum of 2013.

Both times I made stellar returns. Up 60% or so on my total capital in a week or less.

But that was rare. These crashes don’t come that often.

 

Finally giving up shorting – well mostly

I read a few books that made me question if I should be shorting at all.

How I trade for a living, by Gary Smith.

This book isn’t well known for newer traders, but in the early 2000’s it was a popular trading book.

Gary only traded indices, and he never shorted.

Triumph of the optimists by Elroy Dimson/Paul Marsh/Mike Staunton

If you love stats and you love stocks you’ll just love this book. It says a lot, but one of the key takeaways is the US and UK stock markets have a high return when compared to other countries.

And basically it doesn’t pay to be a bear.

Education of a speculator by Vic Niederhoffer

Another book I love. But it isn’t for beginners. You need a few years of experience to appreciate it’s contents.

It was actually the third trading book I read, so it’s contents were lost on me. Much later on a second reading I really came to enjoy it.

It doesn’t really go into shorting but there’s one line that stuck.

It says how George Soros would always lose money on the short side (besides when he broker the Bank of England that is).

And kept pondering than line over and over.

Soon after I quit shorting.

For a few years anyway.

And my P&L improved dramatically.

So here’s my take on why it doesn’t pay to be a bear on US stock markets.

 

The most innovative country in the world

Silicon Valley is just a breeding ground for innovation. New ideas, faster microchip speeds, recruitment of the world’s best talent and so on.

America is probably still the best place to do business – despite its current politics.

This isn’t going to change anytime soon. I mean, where are you going to put your money? China? Europe? No thanks.

 

Plunge protection team

If you read the more gold centric sites out there you’ll already know of the PPT.

This nefarious group are always ready to buy the market as soon as some major trend line is broken.

Or when the Fed has a rate announcement.

And they’ll simultaneously trounce gold.

I don’t know if there really is an evil cabal of bankers and globalists propping up the market.

I have however witnessed huge rallies just as a major support line was violated.

 

Short covering

Markets rally strongest during bear markets.

Not only is there gargantuan piles of money sloshing around ready to buy but you’ve also got short-sellers closing profitable trades or covering unsuccessful ones.

Leading to some of the fastest moves you’ll see.

These rallies are far too emotional for me to be on the wrong side of. Which is more than other the reason I hate shorting.

 

No easy way to short stocks

Unless you are a sophisticated investor, chances are you won’t even be able to short individual names.

You could purchase short-side ETFs, or buy puts – but the stock market just isn’t a natural place for smooth and easy shorting; unlike forex or futures.

 

Decreasing supply of common stock

Fewer IPOs and more buybacks over the years have taken huge supply of stock off the market. And, as economics 101 states, less supply and more money chasing it, means prices have to rise.

 

An irrational fear of shorting

My fear of shorting was because often when I shorted the stock market I’d get my ass handed to me on a plate.

The fear is actually irrational. Why not just try other markets I hear you ask?

I could, but the panic is still there as soon as the market in question starts even the smallest move again me.

Like all painful experiences, it has left scars.

While forex and commodities are easy for shorting, I  believe (but cannot prove) they too have these intense quick rallies – rallies that freak me out.

So why would I waste valuable psychic energy on doing something I don’t like?  Successful trading is all about picking your battles wisely.

Shorting with red Harami Inside Bars

Sometimes just occasionally I break my own rules. Usually when there is nothing going on, on the long side.

Below are some of my more successful shorts – using red Harami Inside Bars.

GBP/USD

XAU/USD Harami Inside Bar Short

USD/JPY Harami Inside Bar Short

USD/JPY Harami Inside Bar Short

 

Final Thoughts

Just because I have a fear of the short side doesn’t mean you should. There are many great shorting opportunities. The fastest money is made on the short side.

Try shorting red Harami Inside Bars.  Tell me how it goes. It would be great to hear of your success in the comments below.

 

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John Scott
John Scott has been trading CFDs and FX since 2003. His favourite markets are the Dow 30, Gold and the GBP/USD. John believes short-term price action trading is the best approach for beginners to trade. Tradeneophytes is his humble attempt at helping new traders reduce the learning curve to trading success.
Posted in Home Page Grid, Trading Psychology.

John Scott has been trading CFDs and FX since 2003. His favourite markets are the Dow 30, Gold and the GBP/USD. John believes short-term price action trading is the best approach for beginners to trade. Tradeneophytes is his humble attempt at helping new traders reduce the learning curve to trading success.

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G Ryan
G Ryan
1 month ago

Monday doesn’t work for me either … and the puts I bought ended up as part of bullish put spreads instead. Can’t wait for your next post.