 With good reason, quite a few formerly long-only stock traders have been exploring the short side of late. Don’t they know it’s unpatriotic? I kid, of course. Shorts add to market liquidity, which helps the whole system operate to the benefit of everyone.
That said, though, questions like this one I recently received are common.
I have been trading stocks for three years now, but under the present financial climate I feel more and more forced to diversify to options. I have read what I could about the Options and CFDs and I am at the stage that I do not know where to get my first tip from for going short, or what criterias I need to pick a suitable stock for shorting. As I dont want to be put-off first time. So, I would be greatfull if you Could tell me, the criterias or the parameters for screening stocks suitable for shorting.
Unfortunately, this isn’t a straightforward question to answer because of the diversity of trading approaches people have. My response is to start by asking a return question:
How do you identify long trade opportunities?
For many traders, screening for short trade candidates is little more than flipping around the criteria used for long trade candidates. This is especially true if one trades from a technical view. Is the oveall trend down, or turning that way? Is the stock over-bought? Is the stock reaching the top end of a range? Those are some of the questions which could set up a good short.
As for the fundamental side of things, the screen becomes one looking at whether earnings growth has turned (or at least weakened) or whether the stock is priced at a very high ratio to book value or with an extreme P/E reading. Are the cash levels very low? Is the company’s buisness exposed to negative developments in the macro economy or market?
That’s really about all I can suggest without have the specifics of an individual trader’s approach.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.
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