If you’ve been reading my articles for some time, you may very well know something that the average person normally doesn’t – you can make money from falling stocks.
Actually, you can make money a whole lot easier when a stock is dropping than the more traditional attempt to find climbing stocks.
All you need to do so are these 4 steps…
Everyone knows at least one way to make money on Wall Street, right? You buy shares of a stock at a certain price, wait for it to climb, and then sell it at a higher price.
But what if you could make money by doing the opposite? If you can do that, you can make money anytime, including when the stock market as a whole is headed straight down!
It’s called short selling, and it can hand you easy paydays when you know the 4 steps to doing it correctly…
1. Don’t short strong stocks because they’re “overvalued”
Short selling is basically just the opposite of buying. It’s really borrowing shares that you can sell now and buy back later, hopefully at a lower price. In essence, you make money when the price of a stock you short sell goes down. Simple, right?
So, much like you don’t want to buy a weak stock, you DO NOT want to short a strong stock. Many people will be yelling that a strong stock is overvalued, but the price is the price for a reason. So if a stock has been doing nothing but climbing, don’t short it because you think it’s too high.
2. Pick out weaklings
So obviously what we want to short is a weak stock. Instead of trying to pick out the climbing stock that could start falling, we would rather focus on the stocks that have been showing their weakness by consistently falling. Look for a declining trend.
And an even more powerful short sale would be pairing an already-weak stock with bad earnings reports. Earnings have the power to send a stock one way or the other 10% or 20%, so a proper short sale mixed with bad earnings should mean an easy payday for you.
3. Ride it down
Don’t be afraid to milk a short sale as far down as you can. Human nature makes us want to close a trade as soon as it’s profitable, but we can happily watch a stock fall and watch our profits pile up all the while.
When the stock manages to stop the bleeding, we can bail. But that’s after we snatch big profits, of course. And we can comfortably do this with our secret weapon…
4. Include a stop loss
A stop loss closes us out of a trade when the price of a position hits a certain point. When buying, you should include a stop loss below the current price of the stock, so if it falls to that stop loss price the position will close before it can go any farther down and cause greater losses. So when short selling, we’ll always include a stop loss above the current price in order to make sure we close it out if the stock manages to climb up to that stop loss price.
When we include a stop loss within 10%, we can comfortably ride it down knowing that we’ll be protected if the stock turns around.
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