We have seen a major shift in the market environment in the past couple weeks. The Dow has dropped over 10% in the last 9 days and has had intraday drops as large as 4%. No one knows if this will be a lasting trend in the markets, but it certainly is causing a lot of panic and fear in the near term.
Knowing how to short stocks is an essential skill to profit in these markets. You can make money on the long side on the large bounces, but you cannot marry your trades. The easier money is on the short side. For day traders, you can actually be making more money in this market environment than a slow uptrending environment because there are more range and volatility to capitalize on. Here is how you can capitalize on the market weakness and grow your trading account when most are losing money.
Great Market for Day Trading To Short Side
This type of market is a day traders dream. Stocks are trading well beyond their normal trading range, and have higher than normal volume. These are two essential components needed for a stock to be of interest, in addition to a daily chart with an obvious bias. The bias has been to the short side of late, with every pop getting sold into hard in the past week. If bounce plays are a setup you specialize in, there is some great opportunities for those type of plays as well.
IRBT: Perfect Earnings Breakdown Play
IRBT last week offered two days of huge opportunity. This stock is on the 8th gapped down after a poor 4th quarter earnings report. It offered a great short opportunity on day 1. It then gapped up on day 2, giving another short opportunity. A gap up in a downtrending, weak stock that had poor earnings the day before will always likely be sold into. That’s exactly what happened, and why we got in short right after the open on that day 2 open and made a huge gain as it flushed under the prior day’s low of day. For more on how we short stocks and played IRBT check out this video below:
Worse For Swing Trading/Longs
If you're a swing trader, you should probably be sitting in cash, or swing shorting some of the stocks with major breakdowns on their daily charts. If you don’t have much experience trading ETF’s or are new, this volatility can be very dangerous. If you're inexperienced or unsure how to trade these, you should stay in cash. It is better to be flat than red. If you want to take a stab at them after studying them for a few weeks, be sure to take small size.
Worst Environment For Chasing
Chasing stocks is destructive in all market environments, but especially in an environment as volatile as this one. With everything having a much larger range than normal, you need to wait for a pullback for a better risk versus reward entry. If you're shorting too low the stock will likely reverse quickly on your entry and you could be down multiple points in a few minutes if you do not manage your risk correctly. Use your MA’s to time your entries on pullbacks. Wait for stocks to retrace to their MA’s and then look for an entry vs shorting them when they are 2 points or more away from them.
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