Traders Profit from Short Selling
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.