How to Identify Long Term Shorting Candidates
A lot of long-term share investors are handicapped to some extent because they only ever trade in one direction.
However if you are a trader, whether it's through futures, options or spread betting, for example, you have a lot more opportunities to make money because you can go short as well as long, which is what I want to discuss in this article.
Finding possible shorting candidates is not really that difficult.
When the wider stock markets go up a lot of the mid and large-cap stocks go up with them which means that even some of the dogs of the stock market still rise to overbought levels.
This creates a wealth of opportunities because it's just a case of finding these poor quality companies and looking for opportunities to go short when they have risen too far, along with the rest of the market.
You can do this by using various technical indicators such as RSI, MACD and stochastics on the daily or weekly charts, or you may choose to wait for the price to break down through key support levels before entering a position.
You can of course short good quality companies as well but to give yourself extra protection you should focus specifically on the weaker companies.
By weaker companies I refer to those companies that have huge debts that they are unlikely to be able to service in later years.
Debt in itself isn't necessarily a bad thing because most businesses need financing in order to grow their business, but when this level of debt far exceeds the overall profits (both the current profits and the predicted profits for the next few years), then the company is likely to run into difficulties in the future, which of course equates to a much lower share price.
You also want to look for companies that either continue to operate at a loss or struggle to increase their profits on a yearly basis.
These companies usually end up losing market share to their competitors and therefore are very good shorting candidates.
Ultimately it all depends on your time horizon.
If you have a firm belief that a company will go bust in a couple of years time and are prepared to ride out any peaks and troughs, then your entry point isn't quite so important, however if you are looking to trade weaker companies simply because they have risen too far in the short-term then your entry point needs to be more precise in order to maximise your profits.
One thing's for sure though.
In today's economic climate there are a lot of poorly run companies who have unmanageable debts and lower profits as a result of the current recession, so there are plenty of potential shorting candidates to choose from.
However if you are a trader, whether it's through futures, options or spread betting, for example, you have a lot more opportunities to make money because you can go short as well as long, which is what I want to discuss in this article.
Finding possible shorting candidates is not really that difficult.
When the wider stock markets go up a lot of the mid and large-cap stocks go up with them which means that even some of the dogs of the stock market still rise to overbought levels.
This creates a wealth of opportunities because it's just a case of finding these poor quality companies and looking for opportunities to go short when they have risen too far, along with the rest of the market.
You can do this by using various technical indicators such as RSI, MACD and stochastics on the daily or weekly charts, or you may choose to wait for the price to break down through key support levels before entering a position.
You can of course short good quality companies as well but to give yourself extra protection you should focus specifically on the weaker companies.
By weaker companies I refer to those companies that have huge debts that they are unlikely to be able to service in later years.
Debt in itself isn't necessarily a bad thing because most businesses need financing in order to grow their business, but when this level of debt far exceeds the overall profits (both the current profits and the predicted profits for the next few years), then the company is likely to run into difficulties in the future, which of course equates to a much lower share price.
You also want to look for companies that either continue to operate at a loss or struggle to increase their profits on a yearly basis.
These companies usually end up losing market share to their competitors and therefore are very good shorting candidates.
Ultimately it all depends on your time horizon.
If you have a firm belief that a company will go bust in a couple of years time and are prepared to ride out any peaks and troughs, then your entry point isn't quite so important, however if you are looking to trade weaker companies simply because they have risen too far in the short-term then your entry point needs to be more precise in order to maximise your profits.
One thing's for sure though.
In today's economic climate there are a lot of poorly run companies who have unmanageable debts and lower profits as a result of the current recession, so there are plenty of potential shorting candidates to choose from.
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