(Australian CFD Traders - Contract for difference - Share Trading - Forex Trader - Stock Indices - Commodities Trader) - In his latest book, “Sell and Sell Short”, author and trader Dr. Alexander Elder discussed one of the most contentious topics in trading and investment: short selling. It is contentious in the sense that the word short selling evokes a lot of contrasting emotions and opinions from people.
Like any other divisive topic, short selling attracts its share of harsh critics as well as ardent supporters. However, Dr Elder’s book did not get distracted by any of the emotions people attach to short selling. Instead he focused on what could be one of the most understated or least discussed topics in trading and investment, that is: the inevitability of selling (whatever you bought).
The book, which has more than 230 pages is divided into three parts. The first part laid out the ground work for every trader and covers the critical topics such as how to buy (the use of indicators and what to look out for before you buy/open a trade); trading psychology and risk management (detailed discussion of the 2% and 6% rule) and keeping records.
In part two, Dr. Elder discussed what he described as one of the least considered aspects of trading, particularly for new traders, which is the selling or exit point. As he rightly pointed out, many traders put a lot more weight and emphasis on the entry (buy) aspect of trading while spending too little or not enough consideration on the exit (selling) aspect of it.
Dr. Elder advocates that traders set a profit target for each trade. He said when he was a novice trader he had a “misguided notion that I was going to get into a trade and get out when the time is right.” At that time he said he was afraid to set a profit target for fear that it would reduce his profit potential. It did him no good during those early days as he had very little profit but no shortage of losses.
He also cited one of his interviewees for his other book, Entries and Exits, who said this about setting profit targets: “People want to make money but do not know what they want from the markets. If I’m making a trade, what am I expecting of it? You take a job – you know what your wages and benefits are going to be, what you’re going to be paid for that job. Having a profit target works for me, though sometimes it leads to selling too soon.”
Dr Elder mentioned several indicators and tools, which he himself use to set profit targets including moving averages, envelopes and channels, support and resistance zones.
As in his other previous books and manuals, Dr. Elder used some of his previous (actual) trades to illustrate two types of selling: Selling at a target and Selling on a stop. He said setting price targets (for a trade) helps you hold on to stocks that move in your favour. Setting stop levels helps you sell when the stock turns against you.
Dr. Elder said using a stop (loss level/order) could be likened to a pre-nuptial agreement when you get married. He said, “If your happy relationship hits the rocks, the prenup will not take away the pain, but it will reduce the hassle, the uncertainty and the expense of separation. What if you’re a happy bull and you discover that your beloved stock has been sneaking out with a bear? Any breakup is going to hurt, but the best time to decide who gets what is when you still tenderly hold each other’s hand.”
Other benefits of using a stop (loss level/order) he mentioned include:
> A stop provides an essential reality check for any trade.
> A single bad trade, if large enough, can punch a hole in your account. A group of bad trades can destroy it. Set stop loss (level/order).
> Not using stops and holding on to bad trades interfere with making good trades.
> Holding on to a losing trade cost you money, pain and missed opportunities.
In part three of the book Dr. Elder talked about what could be one of the most controversial and divisive topics in the markets today: shorting or short selling. In his introduction to this chapter he said, “Everybody understands how to make money from buying low and selling high, but many have no concept of how to profit from price drops.”
After discussing the basics of shorting, its benefits and risks, Dr. Elder talked about specifics of shorting stocks as well as non-equity instruments. This may come handy for those trading indices, futures and currency – which are freely and totally available for shorting. These instruments have the inherent ‘shorting’ feature in them. Those markets simply could not exist without shorting, according to Dr. Elder. This chapter is full of examples to show patterns, tools and ways to find shorting opportunities.
Knowing that not a lot of traders are used to the concept of shorting, Dr. Elder offered a few suggestions on how to go about your first short trades.
His first point is: “Do not try to make a lot of money on the first short,or on the second short for that matter. Go short just a few shares.”
Second point: “Take baby steps without having to worry about money.
Third point: “When you are still learning to short, trade a small size. This is because trade size serves as a huge emotional amplifier. The bigger the size of your trading position, the greater the stress. To reduce stress, limit the size of your trade especially if you’re just learning to short.”
A quote that stands out for me from this book says: “Amateurs don’t know how to short and are afraid of it, but professionals love shorting and profit from declines.
Source: Sell and Sell Short Dr. Alexander Elder
No comments:
Post a Comment