The market has been extremely volatile as of late. As a result, there are many people making ridiculous amounts of money day trading. Day trading, or shorting a stock, is essentially the act of buying and selling a stock in a very short amount of time. This sort of trading is high-risk and is more akin to gambling than investing.
That being said, it can make for much quicker gains than other types of stock trading. The issue is, it doesn’t take very long to lose a lot of money. This is due to the types of stocks people short. To make sure you don’t fall into some major losses, we have a few things you should know. Here is how to short a stock:
Set a Conservative Goal
If you are trying to keep yourself as safe as possible, it is important to set a goal for your gains from the outset. When buying a stock, decide on a percentage gain you are looking to make from it. Once you have chosen this percentage, stick to it. If and when the value of the shares you purchased reaches that goal, sell immediately. Don’t hang on and try to wring extra money out of it, as this is the way that people most often experience losses. On low-value stocks that people like to short, it takes only a few seconds for values to drop astronomically. So, if you are looking to make 5 percent, sell at 5 percent. Most people consider 5 percent gains a good goal for the year. Don’t lose money trying to beat it in a single day.
Set a Stop-Loss Around 1-2 percent
Due to the volatility of shorted stocks, it is important to use technology to your advantage. Most brokerage apps allow you to set a “stop-loss”. Stop losses are values at which your brokerage will automatically sell your shares. These make sure that you don’t look away from your phone and lose 10 percent of your portfolio. For most casual day-traders, you are betting almost your whole brokerage account on each trade. So, set a stop loss of only one or two percent of the current value of the shares when you buy them, and you will ensure that your losses never get worse than 1-2 percent. this will lose you a lot of shares, and you may miss out on a few upswings, but the security is worth it.
Only Short 3 Times Per Week
This one has less to do with strategy, and more to do with the statute. In the United States, you will usually be marked as a “Pattern Day-Trader” if you buy and sell four or more times in a rolling five business-day period. Once you are flagged under these PDT rules, you are required to have $25,000 in your brokerage account to short a stock again. This is obviously an instant disqualifier for many, and so we recommend you keep it to 3 each week.
Join a Group
There are many day trading communities out there. Many of them use live chats to call out what stocks are looking good, which are most volatile (which leads to the fastest gains), and when certain stocks are spiking or falling. This can all be extremely helpful information and can maximize both your gains and your security when shorting stocks. Information is king in the stock-shorting game, and joining a community with a live chat like this is a great way to maximize your information.
Don’t Short a Stock
My best piece of advice for most people who want to short a stock is simple: Don’t. Why do I tell most people not to short stocks? Because most people lose money shorting stocks. In fact, according to the stock trading firm eToro, 80 percent of people lose money doing it. Unless you are going to be as safe as possible, follow this advice exactly. Don’t get involved in day trading. I’ve written another article regarding your personal ability to become a day-trader, even casually. It all comes down to discipline and the effects of a loss on your life. Make a smart decision, and be responsible.
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Trey LaRocca is a freelance writer, financial sales worker, and tech guy. When he isn’t out and about or at work, he’s usually at home enjoying some video games and a beer. Currently residing in Newport Beach, this California Kid can be found at the beach on any given weekend. Trey has years of experience in day/swing trading, financial analytics, and sales.
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