ABB Stock Market Trading continued, Short Sell

My last post gave a brief overview of some of the results of my past studies applied on a current trading plan using only long trades, buying then selling.

This time I want to look at the short selling of the same stock.

I have run into the odd time when I was forced to cover a short position due to the broker's requirements but those are few and far between enough that I don't think I'll worry about it happening that much. Worst case, if a particular stock is difficult to short, I will drop that facet of the plan for that particular stock.

Short selling is basically you borrowing stock from the broker in order to sell it to someone else. The value of the stock at the time of "borrowing" will be the same value that your buyer purchases it at. The purchase transaction is held by the broker until the stock is returned. The idea is that if the price goes down, it is bought back by you (covered) at the now lower price and is returned to the broker. Technically you have managed to borrow an expensive item, sell it only to buy it back for cheaper. You get to keep the difference. This difference is deposited to your account once the transaction is completed.

The old adage of buying low and selling high remains the same except that it is also true to say that you can sell high and buy low.

The reason nobody likes to do this, less than 2% of traders ever short sell a stock, is that the implication is that if the price goes up, the difference now comes out of your account. While buying a stock the value could drop to zero and you lose 100% of the investment, shorting has no limit on the loss, in theory. Once it is short sold, the price has no technical limit and the loss could be greater than 100% of the value of the stock.

Of course this is why stop loss orders are used and adhered to.

The other side of the argument is that typically price moves down are much faster than moves up and a short sale tends to be a much shorter duration trade than the long. This means that the price moving against you is not likely to get away very fast.

On to ABB and the application of the newer methodology.

I'll use the same ideas as the long trading plan but I'll skip all the proving of single entries vs staged entries and fixed profit targets vs VTSO partial exits from the last post. Suffice it to say that trading with the trend, multiple entrys, VTSO exits all work whether the price is going up for a profit or going down for a profit.

With a win rate of slightly higher than 80% and a return of $7.13 per share The idea of short selling a stock certainly makes it worth considering. Compared to the 162% ROI from the long side, 142%, is nothing to ignore particularly when the combined return is $15.26 per share or 305%.

Off to apply this same methodology to all of my other data charts to see, hypothetically, what my returns could have been.

Jeff.