A Reason Not to Short?

01/08/2016 6:00 am EST

Focus: STRATEGIES

Ryan Mallory

Contributor, Share Planner

For the benefit of all traders questioning whether or not they should short stocks given the current market climate, Ryan Mallory, of SharePlanner.com, explains that the reasons he isn’t shorting have to do with risk management and uncertainty, but certainly not with being afraid.

Why am I not shorting stocks right now? It isn't that I'm afraid to short stocks. Far from it. I've made a career off of shorting stocks.

In fact, my short set-ups last year—on the whole—performed better than my long set-ups. I've got no problem shorting stocks, but I do have a problem when it comes to not having the ability to manage my risk.

The intraday action is not the problem, in fact, the intraday action is quite dull. The two sell-offs prior to Thursday's sell-off saw closes above the price that they opened at, with the overall range being quite tight as well, relative to the overall day-to-day price change on the daily chart.

It is the gaps that are the issue here. You have stocks that you can take on a 2-3% stop-loss and it is quite easy to wake up to a 5% or 6% decline in the stock instead, which completely blows up my risk parameters if that were to happen (and it hasn't).

You also have at risk the potential for a significant gap up, and if you are short after the market has already fallen 136 points from the highs that were established on December 29 (six trading sessions ago), you have the potential to wake up and see SPX trading 30-40 points higher because that is what happens in markets when you have huge market sell-offs. A dead cat bounce always ensues. To read the entire article click here…

By Ryan Mallory, Founder, SharePlanner.com

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