How do you trade stocks both long and short?

Any broker is going to lag your trade long so let’s focus on a short side. The real question is, how can I diversify the long side and actually trade short as well? The first thing is you need a broker that will support shorting. That could be if you’re in Australia, or could be most safety brokers prefer short. I don’t actually trade CFDs, and I prefer to trade stocks. I use Interactive Brokers and have a portfolio margin account which allows me to short any stock that’s approved for short selling. You need a broker that will allow you to short in your market so check with your broker. If it’s a standard kind of mom and pop broker, they may not support it, you may have to move. I like Interactive Brokers because they allow me to trade pretty much any market in the world and shorting is very easy. They’ve got a pretty powerful platform and the actual mechanics of doing short trading is dead easy.  You need that, but the main thing is to realize that shorting is actually very different than the long side. To diversify, you need a short selling system that actually works and actually keeps you safe because the risk return profile on the short side is quite different than on the long side.

On the short side, if you short sell a stock at $10 a share, the best you can do is it goes to zero so you can make $10 a share, but the worst you can do is it could go to $100 a share so the risk return is asymmetrical. On the long side it’s the other way round, if you buy a stock at $10, it can only go to zero, but it can go to 100 or 1000 so short-selling systems that work are quite different and much harder to find. Give yourself some time and learn about short selling systems that actually work, certainly back test it and make sure you’ve back-tested it thoroughly. The challenge with shorting is there hasn’t been that many bear markets, so there’s typically much less data available to back test on. We had a bit of a bear market in early 2020, 2008-’09 or 2000-‘01, but they’re only small slices of time. You want to make sure that your short-selling system is very stable and works pretty consistently over time. Don’t base your decisions to trade a system on a couple of 100 trades. You need at least 500 or 1000 trades in your back test to know that it’s really profitable and what could happen so give yourself some time to learn shorting.

In the Trader Success System, I’ve got good shorting systems which really helps. You can add them to an existing portfolio, work on them yourself. It’s a good place to start, but you need a system that is profitable on the short side. You’ve got to be far more careful on the short side. Once you’ve got a system, you need the risk control to keep you alive because when things go wrong, when you’re shorting, it’s much uglier than on the long side. The long side your stocks can fall very quickly but if your stock that has a takeover announcement against it, all of a sudden your neck deep in losses so you go to make sure that your risk control is pretty tight. Your positions are small and don’t use a lot of leverage because it can get nasty pretty quickly.

In order to trade short, you need a broker that supports that and a system that’s profitable and able to follow. You also need the confidence to follow that system and the risk control to keep you alive while you’re doing it.

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