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So, it’s September and you plan
to day trade during the month. While September is known for being a difficult
time for the financial markets it too, can provide numerous financial
opportunities. On average since 1896 when the Dow Jones Industrial Average was
created, September has been one of the worst performing months in all but one of
the 20th century decades, but one between 1911 and 1920. Knowing how to trade
during any month, can be a challenge.
Basically, it appears that
September should actually be a good month to sell short. During the month, many
parents for example must sell their securities to pay for their tuition bills
for children returning to or going to private schools and college, thus a
downhill trend in the financial markets.
Another way to look at
September is that many investors take advantage of the lower prices and start to
dabble in beaten down securities.
The definition of Selling Short
a security is that the seller does not own a security thus; they borrow the
security from the owner, through their broker, in anticipation that the price of
the security will go lower. Margin accounts are generally required for a Day
Trader to Sell Short. Short sellers presume that they will be able to buy the
security back (Buy to Cover to exit the position), at a lower amount than the
price at which they Sold Short, resulting in a profit. Many day traders refer to
Selling Short as ‘betting that a security will fall’ because in reality, that is
what the Short Seller is doing. The Day Trader will enter a position on a Stock,
Futures Contract or Forex Contract (Sell Short) if the security appears to
moving lower. Remember, there is great risk when Selling Short since there is no
ceiling as to how high the price of a security can go.
Exiting a Short Sale position
is also known as Short Covering, ‘buy to cover’ or ‘buy back’ a position.
Remember, Short Covering (exiting) is the method of purchasing a security to
close an open Short Sale position. For a Day Trader to realize profit, the short
seller must cover the short by purchasing the security below their original
Short Sale (entry) price.
An example of Short covering
for a Stock:
A trader sold short 100 shares of XYZ stock at a price of $10 per share, the
price of the Stock moves down to $9 per share and the trader is profitable by 1
point on their 100 shares.
Another trader sold short 100
shares of XYZ stock at a price of $10 per share, the price of the Stock moves UP
to $11 per share and the trader has a loss of 1 point on their 100 shares.
At no time should a novice
investor or novice Day Trader initiate a Short Sale for any security unless they
have demo-traded the method for a month or more, prior to risking actual trading
capital.
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