First off, before you learn the secrets to successful short selling of stocks, you must understand that selling short stocks comes with a much greater risk level than regular stock investing. Normally there are very simple precautions that you can take when buying and selling stocks for profit. It is possible for you to literally lose your entire investment in a short period of time when investing for the purposes of short selling stocks. Short selling should only be engaged in by seasoned investors.

So how does short selling work exactly? Well normally you make money on a stock when you purchase the stock at one price and sell the stock at a price higher than what you originally purchased it. The difference in prices is your profit. With short selling it is the opposite. You sell the stock first at one price by borrowing shares to sell from your broker. You then buy the stock at a lower price so you can give the broker back his or her shares. If you buy the stock at a lower price, the difference between the higher price you sold at and the lower price you brought at is your profit.

So how do you successfully short sell stocks? The first thing you want to do is make sure the market is in an overall decline before considering engaging in short selling. In a bull market, 3 out of 4 stocks go up in value. That means you already have a 75% chance of losing money. If the overall market is headed downward, you have a much better shot at making money.

Secondly, look for changes in the company that could trigger a downward trend in the overall price. A lower than expected earnings report can result in downtrend in stock price. In particular slowdowns in financial numbers are huge signs of a potential decrease in price.

Third, there are certain chart patterns that indicate possible sale declines. For instance, if you are familiar with the cup with handle chart pattern, you know that this is a common technical chart signal that indicates a potential rise in stock price. The opposite of this pattern, known as the inverted cup with handle or the head and shoulders pattern is a signal of a potential decrease in stock price. Many of the stocks that have made substantial decrease in prices have shown this pattern. Another chart pattern of a potentially declining stock is when the chart makes a pattern that looks like the letter M. When the price breaks below the previous bottom at the end of the M is the time to short.

By: S Mcleod

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