A lot of people ask me for tips on short selling penny stocks as beginners. Here are a few tips and tricks I’ve learned through my experience.
The Difference Between Long And Short: Risk Management
At the beginning of my career when I first started getting into the stock market, I learned there are two ways to do the market: long or short. If you go long, the maximum you can lose is 100%, which means if you bought a stock and the stock goes to zero then you lose 100%. But short sell is completely different. Let’s say the short started at $1 then went to $100, you’re instantly down 10,000% of your original position. There’s a potential risk you could blow up your entire account or owe brokerage money. Many people hear about how you can blow up your entire account, which scares them away from short-selling. So if you are a beginner and you want to learn to short sell, you have to focus on risk management, especially in the open stock market.
Focus On Risk Reward
The second thing you need to focus on when short selling is risk reward. You can either do a 1-2 or a 1-3. For example, maybe you’re risking 30 cents to make a dollar. Or you’re risking 40 cents to make 1.2 dollars. If you’re going long, risk management is also important. But on short sell it’s even more important because you cannot let your losses continue to snowball until you lose everything. Eventually it has more risk than long, which is why a lot of people are scared of short selling. But in my opinion, if you have the correct risk management, I think there’s more edge in the short sell versus going long. I’ve tracked multiple patterns, and I’ve found that both long and short work. But I think that in the end, short works better for me because it has a little bit more edge.
Watch For Trends And Hypes
Another thing you need to watch for are trends and hypes. Depending on what’s trending in the market, a lot of different hypes will show. For example, 2016 was Wii, 2017 was Bitcoin, 2018 was also Bitcoin, and 2019 was another bio-tech. All of those are run by low flows, meaning that they have a really low supply and the demand is really high. So, when there is an overwhelming demand, it overwhelms the supply and the price range jumps significantly in a short amount of time. That’s how low flow works, and it can be very dangerous for short selling. A lot of people try to make big money on short selling into microflows, but if you don’t have enough experience and you don’t have good risk management, it’s really easy to blow up your account. If you start short selling, never try to short into microflow unless you’ve watched at least 50 examples that have already happened. You can try to find some kind of pattern, but most of the time there are short squeezes like RKDA, BPTH, and DRYS. When it comes to those tickers, if you screw up once and you lead the losses wrong, you can screw up your entire career.
Learn the Psychology Behind Both Sides
Whether you decide to sell long or short, you need to figure out the psychology behind both because you need to manipulate the other side to calculate your risk reward. For example, let’s say the stock has been consolidating in the $2 area, and once the $2 cracks, most of the long will panic. You can short into that crack, and then expect more panic. That’s one thought pattern you can learn from the longs. Additionally, if you’re going short you can look at an area and recognize the risk level of short sizing that area. And if that level specifically broke, then you can start going long, knowing short squeezers will come. So at the end of the day, make sure you learn the psychology of both long and short sides. It will give you a significant advantage trading the market.