Short selling [1] can generate some nice profits….quickly. Maybe that’s why the word short is used – because it can be such a quick trade.
I noticed OPMR this afternoon and cringed for those traders caught on the wrong side of a short squeeze. This stock had been moving steadily lower and had even confirmed a couple of chart patterns [2] along the way. However, trying to swing trade [3] a stock so badly beaten up on the short side can be tricky, so be sure that you pay attention when you’re short.
[4] OPMR had been moving steadily lower before the trade got crowded and the path of least resistance suddenly changed.A short squeeze occurs when a downtrending stock [5] suddenly catches a bid and begins to rise. The traders who have short positions begin to see their trading profits [6] slip away, causing them to panic and buy to cover their shorts. This quickly pushes prices higher, and upside momentum replaces the downtrend [5] due to the sudden burst of buying. One look at this 2-day chart of OPMR and it’s easy to see that plenty of traders got caught on the wrong side.
[7] Once OPMR changed directions, it was smooth sailing to the upside with shorts covering for the past 2 days.Uptrending stocks [8] will occasionally be met with a heavy dose of selling, seemingly out of nowhere. This is the same kind of behavior that leads to short squeezes, and is characterized by a large group of traders reacting to a shift in a stock’s direction.
Short selling [9] is not a poor trading method, so there’s nothing to be afraid of. As long as you keep your stop loss in place and remain disciplined, you can avoid getting caught in a short squeeze. Just don’t ever underestimate the level of pain in a stock when you’re trading the short side, and be quick to take profits when the landscape begins to change!
Add another dimension to your trading and watch how I trade the short side with a 2-week FREE TRIAL to my stock newsletter [10].
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com [3]