In trading, as in golf, the importance of having a good “short game” simply cannot be overstated.

It remains true that the majority of traders seem to have a built-in prejudice against selling short, and a corresponding predisposition to buying long. This has been particularly unfortunate in the recent past, as the futures market was essentially a bear market throughout the last two decades of the 20th century. (It is, I’ll note here, definitely a bull market at the moment, and the bull market in basic commodities should continue for at least another three to five years. However, even bull markets have down cycles in them, so it’s still important to be ready to go short when it’s appropriate. (Cocoa, after rocketing above 20 for the first time in decades, came almost all the way back down to its original take-off point before shooting back up – the perfect play would have been buy-sell-buy, much more profitable than a “buy and hold” strategy.)

The interesting fact is that it’s really easier to make money from the short side than from the long side, as markets always tend to fall more rapidly than they rise. Investors are much more prone to panic selling than they are to panic buying, and just as in the physical world, it’s simply easier to fall down a mountain than it is to climb up one.

Therefore, if one correctly enters a market on the short side, he/she is more likely to see a quick, significant profit than is usually the case with adopting a long/buy position. I also believe that a study of historical market statistics will reveal that a bear market tests short-term tops less frequently and intensely than a bull market tests short-term lows. What this means for a trader is that, when selling short, one generally doesn’t have to take as much heat worrying about being stopped out of a position as is true when buying long, and a trailing-stop can be more effectively used.

It may help to remember things like the fact that the two most profitable trades of the legendary trader Jesse Livermore were both short sells. What’s the absolute best trade, the most massively profitable killing that anyone could have made in the last century? – Sell the stock market short in 1929.

I have tried a number of methods over the years to help traders get over their in-born prejudice to be buyers rather than sellers. One has been to try to get them to just look at their market choices in other terms besides the traditional notions of “up” and “down”. Try thinking, instead, of choosing, say, between “right” and “left”. Or look at the two options of market prices going up or down as being like the two options of “red” and “black” in roulette (fortunately, we don’t have to worry about zeros or double-zeros in market trading). At any given moment, with every new spin of the wheel, the odds are perfectly even between the two choices. Such new perspectives have helped people more clearly see that the market itself has no built-in preference for price movement up or down. Once they can clearly realize that fact, it becomes easier for them to adopt and maintain a similarly neutral position, one that’s not overly inclined to favor long positions over short positions.

There are not too many guarantees in the world of trading, but I can guarantee you this: Your trading will be more successful when you are just as willing to sell a market as you are to buy it.

Halston Adams
www.futures-trading-strategy.com

Categories: Uncategorized