With the global pandemic and market crashes, a lot of traders think short selling coronavirus is a no-fail tactic…
Yep … the coronavirus, massive market crashes, and a transition from a bull to bear market … It’s been a crazy month for trading.
So with all of these radical changes, how can traders approach the stock market right now?
A lot of traders think short sell EVERYTHING!
OK, fine. There’s some logic behind that thinking. In a bear market prices tend to go down, right?
The problem is that not EVERYTHING is declining. Coronavirus sectors and sympathy plays are super hot, and the market action has been fast and furious.
There’s also a lot of inconsistency in the market right now. Large-cap stocks have generally gone down … But some still have surprise price spikes — and that can be bad news for short-sellers.
Plus, the market’s too complex now to approach with an oversimplified “short everything!” perspective.
So how can you approach this wild market intelligently? Read on for what you need to know about short selling coronavirus — plus tips for trading smart through these crazy times.
Table of Contents
- 1 What’s Short Selling?
- 2 Short Selling Coronavirus: What You Need to Know First
- 3 The Final Word on Short Selling Coronavirus
- 4 One Platform. One System. Every Tool
What’s Short Selling?
I’m sure you already know this, but just in case … Let’s do a quick review of short selling.
Short selling is a trading strategy where you think a stock will lose value.
First, you borrow shares from your broker, then sell them — taking a negative position. From there, the stock hopefully continues to dwindle in price. You buy back the shares and give them back to your broker … and keep the price difference for yourself.
You’re still buying and selling, but the process is kinda inside out.
There’s some serious risk with short selling. If the stock price goes up instead of down, you can find yourself in an extremely sticky situation. You’re still responsible for buying back those shares and giving them back to the broker.
And if there is a spike, you could find yourself in some serious hot water — or even the poor house!
Wanna know more about short selling? Check out this post.
Why Not Just Short Everything?
Plenty of newbies have a deluded fantasy that they can just short everything, make a fast few million, and live happily ever after.
Many big-name stocks are all significantly down … So now’s the time, right?
Sorry, it doesn’t necessarily work that way. Let’s talk about why this is a dangerous approach … and how to intelligently choose trades!
Get Shorty? Not so fast. Here’s some food for thought BEFORE you sell short in the current market…
The Market Is Irrational
The idea of “short sell everything” kind of assumes that the stock market is rational. It’s not.
The market is totally irrational, now more than ever. Things are moving at lightning speed, and it’s hard to anticipate what will happen next.
Consider Astrotech Corp (NASDAQ: ASTC). Just days ago, this stock was in the $1s. Then, it started spiking on news. When it reached the $3s, a ton of traders started taking short positions, figuring it was bound to fail.
Check out the chart:
What happened next? It shot up to over $7. Major oops.
That’s the danger with an irrational market. If you try to guess or anticipate what will happen in a short position, you could be proven devastatingly wrong.
Shorting is dangerous, even if it’s a first red day. Even the flimsiest news could cause a spike and you could get squeezed.
Shorting Large Caps = Big Danger
Short selling real stocks (by that I mean non-penny stocks) is for idiots!
Lately, the market and the economy are looking pretty grim. For a lot of short-sellers, it seems like a great time to short large-cap stocks.
But as a cautionary tale, let’s take a look at Boeing Co. (NYSE: BA).
A month ago, it was trading for over $300. As the coronavirus pandemic slowly started taking over our lives, it started dropping fast — all the way down to the $90s.
Here’s the problem with shorting stocks like this. It’s impossible to know where the market will bottom out — or when a catalyst might change the game.
As news of bailouts and a federal stimulus package hit the news, Boeing started an upward ascent … It’s in the $180s at the time of this writing. NOT great news if you took a short position.
Remember: large-cap companies didn’t get to where they are by accident. These established companies generally do something right. So as the market recovers, many of these stocks can recover, too.
Between Monday, March 23 and Thursday, March 26, the Dow rallied almost 20%. Could that mean the bear market’s nearing an end already?
Don’t be an idiot. If there’s anything this crazy market has shown us, it’s that things can change very fast.
A lot of these large-cap companies probably aren’t going away any time soon. Honestly, there’s probably a stronger case for dip buying these big company stocks instead of short selling them.
But don’t take that as an absolute. Again, you don’t know where the market will bottom out or turn around. Always be cautious. Have a strong trading plan, whether you’re long or short.
Holding Overnight Is Dangerous
No matter the market conditions, there’s always a trade somewhere. Right now, those trades are mostly related to the coronavirus.
Some of those plays are directly related to the virus, like biotech companies working on potential vaccines or tests.
Others are indirect or sympathy plays — food delivery services, work-at-home solutions, and so on. For a review of some of the hottest coronavirus sectors and sympathy plays, check out this post.
A lot of these plays spike fast and hard, then taper down. But there’s still a lot of unknown, and some of these companies experience multiple spikes.
So holding a short position overnight is VERY dangerous right now.
Say you’re short something overnight. The market’s down, and you think, I’m gonna bank on this short!
Then, the Fed announces news, the SPY rips up, and you get smoked. This is happening left and right in this insane market. You gotta be careful.
And overnight or weekend holds can be dangerous for long positions, too. Say you’re long over the weekend, and the market goes down.
You panic and sell your position first thing on Monday … Then news makes the market rip back up.
Overnight holds are dangerous right now. I know that you don’t want to hear this, especially if you’re under the PDT rule. Don’t shoot the messenger…
But now is a great time to sharpen your trading skills — come join us at StocksToTrade Pro!
You Can ALWAYS Get Stopped Out
I love analogies, so think about it this way…
Even if you do everything right in life — you eat well, meditate, and stay healthy — you could still walk outside and twist your ankle. It’s not because you did something wrong. It’s because you didn’t see that rock on the sidewalk.
Same is true in trading. You could have a rock-solid trading plan. You could pick the “perfect” stock to short. But then something unexpected could happen that changes everything. Long or short, you can ALWAYS be stopped out. Don’t forget it.
Every trader makes mistakes. That’s inevitable. If you mess up, learn from the experience and keep improving over time. And cut those losses fast.
Smart Traders Think Ahead
There’s a reason my friend and fellow trader Mike Huddie is so successful as a short seller. In a recent video, he talks about how “whenever these stocks start running I’m always winding up my backhand for the short.”
Think ahead! Smart traders have a watchlist and a plan ready so that when sweet setups come along, they’re prepared to pounce on opportunities.
But it’s a balance: thinking ahead isn’t the same as trying to anticipate what will happen. It’s more about being prepared, then reacting to what the market presents.
From my experience, informed traders are less likely to do stupid things. They also use smart tools and resources…
StocksToTrade is an amazing resource for scanning, watchlists, and research.
Created by traders for traders, this powerful platform is designed to help you find the most promising opportunities. You’ll have access to charts, stock quotes, news, scanners, watchlists, and so much more.
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It can be tempting to go on a short-selling spree in a downtrending market…
But you gotta remember that there are never guarantees in the stock market. It’s impossible to know how long a downward trend will continue or when it might suddenly reverse.
Is it possible to make money by shorting? Sure. But right now, things are moving fast, and the market landscape changes on a daily basis.
That means you’ve got to do everything you can to stay safe! The StocksToTrade Pro community is still trading through this crazy market — and we’re staying safe. Check out how we learn to trade in ANY market. Join us today!
Have you been short selling during the coronavirus market craziness? What’s your experience been? Please leave a comment!