How Does Short Selling Work?

Short selling is a way to potentially make money in a bear market. When stocks go down, you can profit. Crazy concept huh? After all, as the saying goes, “buy low, sell high.” With short selling, the saying goes, “sell high, buy low.”

This is actually a strategy used by many, even in bull markets. There are always short selling opportunities. Do I short sell? Nope, never have. I do buy put options, which is kinda-sorta the same thing.

So what is short selling?

You borrow shares from your broker and sell them on the open market. Later on – if your analysis was correct and the share price drops – you buy the shares back at a cheaper price than you sold them for, and you keep the difference as profit.

Let’s say ABC is currently selling for $100 per share. You have done your research and proper analysis, and you think ABC is going down. So, you enter a “sell to open” order with your broker, for 100 shares. Your broker lends you those shares and they are automatically sold for $10,000 ($100 per share times 100 shares).

The $10,000 goes into your account, as that is what you sold them for. But DO NOT SPEND THIS MONEY, lol… the trade could go against you.

A week goes by and ABC is down $10 per share to $90. Woo hoo!! Fantastic analysis you did. You decide to close out your position by placing a “buy to close” order. The order is executed, and you just bought the shares back for $9,000 ($90 per share times 100 shares). The broker gets their 100 shares back, and you keep the difference of $1,000 ($10,000 you sold for minus the $9,000 you bought them back for).

Short selling was a bit confusing to me when I first learned of it. I thought, how in the world can you make money when a stock goes down. Well, if your broker is willing to lend you shares, that’s how. You do need a margin account to place short trades. And, of course, margin accounts can be very dangerous for a multitude of reasons.

If you are interested in short selling, contact your broker to find out what you need to do. Also, DO YOUR RESEARCH AND KNOW WHAT YOU ARE DOING FIRST!!

Descending Triangle

I like to keep my charts simple – simple is better! There is no need for a chart to look like a laser-light show. So, my favorite chart patterns are the simple shapes: Rectangles, pennants, flags, and triangles. All are simple, and all are consolidation patterns waiting for a break-out.

Take this /CL chart I did today (/CL is oil futures). An almost perfect descending triangle has been in play since April.

Notice the lower-higs? Notice the major support on the bottom of the triangle? Ya, it’s pretty much a classic descending triangle. If I were to trade a descending triangle, I would simply sell at the resistance (top edge), and buy at the support (bottom edge). Does this mean I will make money? No, but it gives me better odds.

The thing about any chart pattern, is you have to make sure it’s going to end up like the pattern you think it’s going to be. If you notice, oil broke out of the triangle a month ago – that is when the Saudi Aramco attacks happened. But It soon came right back into the triangle, and eventually bounced off support once again. However, if you were bullish on the break out, you would have lost if you held your position. Just goes to show you that NOTHING is 100% certain.

I look for certain things when I think I see a triangle: 1) Has the triangle resistance and support been touched at least 2 times each? And 2) Is the size of the triangle relative to the chart size. What I mean is… if it’s a daily chart, and I think I see a triangle but it has only been in the making for a week or 2, I won’t play it. Notice the chart above has been in play since April – that’s pretty convincing to me.

Lastly, in general, descending triangles usually break to the downside once they break out of that pattern. The opposite is true for ascending triangles. Does it always happen this way? NOPE! Again, NOTHING is 100% in the market, which is why you must do your homework and stay diligent with your trades.

ZERO COMMISSION AT TD AMERITRADE

Woo hoo! My broker, TD Ameritrade, now has ZERO commissions. I am very excited about this.

TD Ameritrade announced this a couple days ago, after Charles Schwab announced they were doing the same. The zero commission trades on stocks, ETFs and options started this morning; Charles Schwab rolls their zero commission out on October 7.

I can only assume this is the latest, greatest, and next big thing to hit the online broker market. We can all thank Robin Hood for this, as they were the first to do so a while back.

This is really fantastic news in my opinion. Prior to this morning, I paid TD Ameritrade $6.95 for stock and ETF trades, and $6.95 PLUS .75 cents PER contract for option trades. YIKES! For options, that adds up quick! There is still a per contract fee for options, but it’s only .65 cents per contract and that’s it.

If you are a long-term investor and hold your investments for 6 months, year, 2 years, etc., then the fees were probably no big deal to you. However, for people like me – swing traders and day traders – the fees added up QUICK!

I placed my first option trade this morning with the new zero commission thing, and it felt GREAT!!