XJO overbought- Will going short work?

[seaurchin]

like a company can and index be overbought?? I see analysts like the guy on TV..newspaper from commsec ..''this markets still going higher because of this and that ..surely after a rise of this magnitude they should be asking for CAUTION ...its heated and we know what happens in hot markets.
Do these analysts buy for them selves ?? or do they make commission telling you to buy the market ..would they be telling there parents to buy now..surely not..''may be you could buy option ''PUTS " or is shorting beyond the average investor?'' wait and see panick come into this rally with NEWBIES lured into a market that will come down hard....AGAIN..just wisdon.
puts ...xjo looking @ 4250 sept. now. :2twocents

[wayneL]

like a company can and index be overbought?? I see analysts like the guy on TV..newspaper from commsec ..''this markets still going higher because of this and that ..surely after a rise of this magnitude they should be asking for CAUTION ...its heated and we know what happens in hot markets.
Do these analysts buy for them selves ?? or do they make commission telling you to buy the market ..would they be telling there parents to buy now..surely not..''may be you could buy option ''PUTS " or is shorting beyond the average investor?'' wait and see panick come into this rally with NEWBIES lured into a market that will come down hard....AGAIN..just wisdon.
puts ...xjo looking @ 4250 sept. now. :2twocents


If IV's are low, consider a straddle. ;)

[Battman64]

80% to 90% of new traders lose money
This is a very well known fact.
Many new people have been busy buying stock today.

[seaurchin]

thanks waynl...i noted straddle if iv low the broker and clients have taken some as well 4250 septxjo. puts...slight increase since the huge rise friday on xjo.Yesterday weakness could bring volatility into this market hence puts rising with open interest. ''View from the top '' shares mag p68 good read.
cheers .smile for a change as steam comes out of this market. :)

[positivecashflow]

hence puts rising with open interest

High Open interest on put does not necessarily suggest a bearish market. Open interest simply means positions opened thus eg when you "sell to open" a put, this would imply a bullish position. Open interest does not give a view either on synthetic positions eg long stock/long put = synthetic call = bullish.

:2twocents

[seaurchin]

waynel& pcf...hey I'm not closing my position in 4250puts sept.

my broker actually rang and congratualated me as if i had already made money ...well i have on paper ...we (broker) and me decided to hold for
expectation XJO reversal is closer to 4200 or lower.
I have not see USA ..dow jones have a bad night?? If this by chance happen a fall in XJO could be much anticapated ..volatile creeping in ?
cheers to you both. :)

[Battman64]

80% to 90% of new traders lose money
This is a very well known fact.
Many new people have been busy buying stock today.

Wasn't this the truth?

[tech/a]

Many old hands were buying as well.
Most old hands are aware of corrective moves.
Many old hands are prepared/infact expect occasional losses.

Easier to trade with a long term plan.
Its not about being right or wrong its about being profitable.
Corrections and less than perfect timing are simply a cost of business.

The 90% that lose dont lose purely because they dont get their timing exact.

Could still come off some more.

What do you think is in store say over the next 3 mths? (Anyone).
And if your not buying now when would you?---just interested.

[wayneL]

Trading short only works well with short term methods.

Longish term, trend trading methods are no good for shorting.

For instance If tech shorted those multibagger trades, the profit would *always* be less than 100% (unleveraged) whereas long trades can bag 200, 500 1000%

This mean the risk reward is not worth it....simple mathematics.

Swing trading is a whole 'nuther bowl of wax though.

Cheers

[Mofra]

Trading short only works well with short term methods.

Longish term, trend trading methods are no good for shorting.

For instance If tech shorted those multibagger trades, the profit would *always* be less than 100% (unleveraged) whereas long trades can bag 200, 500 1000%

This mean the risk reward is not worth it....simple mathematics.

Swing trading is a whole 'nuther bowl of wax though.

Cheers

Wayne,

You wouldn't class a long put trade as (effectively) a short? I've always called them such for ease of explanation, because leveraged or not you are profiting from a falling stock price.

Cheers

[wayneL]

Wayne,

You wouldn't class a long put trade as (effectively) a short? I've always called them such for ease of explanation, because leveraged or not you are profiting from a falling stock price.

Cheers

Yes you are short because the delta is negative.

But I wouldn't class a long put as a long term trade.

I regularly short, (in fact most of my recent profits have been from shorts), but if i was trading techtrader, I would most definately not short sell.

Trend trading works becuase of the outliers i.e. the few trades that net several hundred unleveraged percent.

If you backtest these types of systems using shortselling, the results are underwhelming.

Example:

Lets say XYZ wnt from $1 all the way to $10 and then collapsed all the way back to $1 again

Trader A goes long @ $1 and clairvoiantly sells at the exect top of $10. He has made 900%

Trader A phones his mate Trader B and tells him that XYZ is buggered and has sold.

Trader B thinks its a good short and does exactly that, he shorts XYZ @ $10. Blessed with the same forsight as Trader A, Trader B covers at the exact bottom....$1

Both traders have traded a $9 move in exactly the same stock. The long trade netts 900% yet the short trade only 90%.

The cruelty of mathematics!!!!

Cheers

[tech/a]

Must remember that example Wayne.

Guess thats why its called a short -----
And a Longs---well Long-- hahahah

[clowboy]

Waynel

That example puts the mathmatics side of profit into persective so well.
The deception of price movement is amazing.

Thanx for posting that example - it is helpful to those of us who already understand (as well as those who may not) it even as a refresher.

Thanx

[Mofra]

Wayne,

Thanks for reply & putting it so clearly. Just one final question on shorting, I haven't short sold equities before but I thought if you were to short sell XYZ at $10 you were only required to put up a margin for the sale (much like a written call or put). Although in percentage terms long trading would still hold a sizable advantage, on the margin would it not be possible to gain a greater than 100% return?

Thanks

[wayneL]

Wayne,

Thanks for reply & putting it so clearly. Just one final question on shorting, I haven't short sold equities before but I thought if you were to short sell XYZ at $10 you were only required to put up a margin for the sale (much like a written call or put). Although in percentage terms long trading would still hold a sizable advantage, on the margin would it not be possible to gain a greater than 100% return?

Thanks

That is true for Australian Accounts. However, if you are using money management, your position sizing will be the same for shorts as for longs, irrespective of the leverage available.

In the US markets you cannot short shares unless you have a margin account and the margin requirements are identical for longs or shorts. Likewise for aussie CFD accounts.

Cheers

[Mofra]

WayneL,

Many thanks for reply. You seem to have also touched on the issue of position sizing for leveraged products vs shares, something I had problems with early on. Given your experience and the clarity with which you explained the greeks, if you get a chance to explain your method of position sizing your option trades I'm sure more than a few would find it interesting.

Ta

[seaurchin]

i've taken proifits and sold out puts 4250sept.good return.
lost the ANZ puts but still managed to grab better than expected...theloss was well less than my profit on 4250 s ..cheers and waiting for next one??
i've bought 2 stocks ...OTL...and TNE....low bases coming off and have been oversold worth a look ?cheers :)

[DTM]

i've taken proifits and sold out puts 4250sept.good return.
lost the ANZ puts but still managed to grab better than expected...theloss was well less than my profit on 4250 s ..cheers and waiting for next one??
i've bought 2 stocks ...OTL...and TNE....low bases coming off and have been oversold worth a look ?cheers :)

XJO and ANZ's starting to look weak to me. We could be in for a big fall. :2twocents

[seaurchin]

dtm....i'm out of all options for now ..while i;m in front.
have bought TNE,GTG,OTL..recently ...otl is suppose to be agoodn from my sources...anyway may be afluke but i've landed all 3 up...

i expect next week index to rise again to @ near highs...interesting what
happens..cheers :)

[seaurchin]

after selling my shorts XJO 4250 last time when index was near 4312...I now wonder today as we have fallen to 4235 abouts ...what should we do ??
1...get on board with bears and pay the 20-30% more or as soon as we have an up day the premiums will come back abit..cheaper and we still think our direction down is in place...

2...buy calls instead of puts...they look cheap today?but in aweeks time we may get cheaper than this???

what do we do here ....its a tough Question.....oh by the way as it turned out ANZ july puts would have been a profit insted of taking a loss...bugger
I thought that into july its too close to over and I red someone here said VOLATILITY DUMP...think it was Bundy?actually .
well it looks i made the right direction decision ...ANZ down to my target but guessed the option valued would decrease earlier ...it did not.

i'll be buying soon ...but waiting for direction confirmed and possibly pay the
higer price ...may be...sept xjo puts..or may be decxjo calls? :confused:

[seaurchin]

visiting XJO 4300s again ...sept puts 4300 today look good.
we may not go too wrong on this ..to me I see buying calls more at risk so i hedged again aginst my shares..which have all risen quite well last week.
someprofits taken as well .
got in on float CMV...cma corp ..up some 50% in days !better leverage than oppies....just kidding ...strong debut on listing good company.
may pull back ...wait see now..with index...to..cheers :)

[Martina]

....For instance If tech shorted those multibagger trades, the profit would *always* be less than 100% (unleveraged) whereas long trades can bag 200, 500 1000%

This mean the risk reward is not worth it....simple mathematics...

Correct my Maths......
If going short, sell at $8.00, buy back at $1.00, Is that not 800% profit?
It's the same as buying at $1 and selling at $8 going long is it not?

[mit]

I think this is more the point

Short 1000 shares at 10 dollars. Maximum profit $10,000 if they go to zero.
Buy 1000 shares at 10 dollars. Shares go to $infinity you have made infinity dollars.

If you had $8000 to spend:

1000 shares at $8 = $8000 Sell at $1 make $7000
8000 shares at $1 = $8000 sell at $8 make $64000

This is illustrative only as I think you are required to only front up with a deposit when shorting shares. Although for CFD's it certainly would be true as the margin is the same in either direction (ignoring interest differentials).


MIT

[Martina]

Now we have cleared up the furphy re “....the profit would *always* be less than 100%…....simple mathematics...”.Here’s the next one:

“....Buy 1000 shares at 10 dollars. Shares go to $infinity you have made infinity dollars...”

Theoretical mumbo jumbo.

If you only trade long and I only trade short I will possibly make more money than you do quicker.
Why? Because shares going long move slower than shares going short.

My profits can also be infinity, who says I only can trade 1 stock?
Your shares going to infinity will not happen. 99 % of traders are buying and selling constantly from one to another. If long traders can and do, why not the short trader?

Just thought to clear up some myths before everyone starts believing them :)

[DTM]

Well it could be time to see who's right, the long johns or the short skirts... :D

[GreatPig]

sell at $8.00, buy back at $1.00, Is that not 800% profit?
Actually, no: it's 700% :D

Your initial capital doesn't count as profit.

Cheers,
GP

[GreatPig]

If you had $8000 to spend:

1000 shares at $8 = $8000 Sell at $1 make $7000
But when you short at $8, you receive $8 per share, not spend it. Ultimately you only spend $1000, which means to be comparable to the long position, you could have bought 8000 shares ($8000 spent and $64000 received in both cases).

Transaction costs and loan interest are a separate issue, which may make shorting more expensive.

GP

[DTM]

Transaction costs and loan interest are a separate issue, which may make shorting more expensive.

GP

That's happened to a friend of mine too. He caught a nice down movement about 30 cents with 2000 shares and didn't end up with any money because the costs involved ate up his profits. :(

[wayneL]

Now we have cleared up the furphy re “....the profit would *always* be less than 100%…....simple mathematics...”.Here’s the next one:

“....Buy 1000 shares at 10 dollars. Shares go to $infinity you have made infinity dollars...”

Theoretical mumbo jumbo.

If you only trade long and I only trade short I will possibly make more money than you do quicker.
Why? Because shares going long move slower than shares going short.

:)

If you weren't so rude I would go to the trouble of correcting your misconceptions, but now I'm not so bothered.

Furphy indeed! :321:

[wayneL]

For the benefit of the other posters here who are far more polite, lets have a look at what I said and in what context. It seems some of the posts were deleted which makes my post lose a bit of context.


Trading short only works well with short term methods.

So shorting is good for short term methods. No disagreement here. My method is short term so I short often and aggresively.


Longish term, trend trading methods are no good for shorting.

My comments were specifically in reference to Tech/A's system which is a long term trend following system. I stand steadfastly by my above comment that shorting with this type of sytem is not so successful.


For instance If tech shorted those multibagger trades, the profit would *always* be less than 100% (unleveraged) whereas long trades can bag 200, 500 1000%

Tech's system has a low win/loss ratio but a high risk/reward ratio. This means that extraordinary profits in this system rely on some of the results being at the far right hand side of the bell curve. In other words these are the multibagger outlyers such as UTB and CTX.

There is nothing wrong with that, it's just how it works.

The thing to remember with bell curves as they relate to trading is that they are semi-logarithmic. There are no outlyers on the left hand side of the bell curve because we run into ZERO. We cannot make a profit on shorts past this number...no matter how fast or slow it gets there.

One admission. I included the word unleveraged in my above statement which can be misleading. Why? Because when we short sell we only have to put up a margin amount. This means that shorts are always leveraged and returns in excess of 100% are possible on our capital outlay.

Lets go through the numbers one more time. This time using actual leveraged returns.

I wrote:


Example:

Lets say XYZ wnt from $1 all the way to $10 and then collapsed all the way back to $1 again

Trader A goes long @ $1 and clairvoiantly sells at the exect top of $10. He has made 900%

Trader A phones his mate Trader B and tells him that XYZ is buggered and has sold.

Trader B thinks its a good short and does exactly that, he shorts XYZ @ $10. Blessed with the same forsight as Trader A, Trader B covers at the exact bottom....$1

Both traders have traded a $9 move in exactly the same stock. The long trade netts 900% yet the short trade only 90%.

But to short stocks you need to have a margin account. (I'm using US rules here, don't know if the same for ASX)

Now the margin rule are that initial margin is 50% of the position size, whether going long or short.

Lets suppose both trader a and trader b use a $10000 position size.

trader a buys 10,000 shares @ $1 and puts up $5000 margin. When he sells at $10, the proceeds from the sale are $100,000. This is $95,000 profit which is 1,900%

trader b shorts 1000 shares @ $10 and puts up the same, $5,000 margin. However, when he covers, the profit returned to his account is $9,000 which is only 180%

Once again I point out that both traders have traded a $9 move in the stock. Additionally, both traders have put up $5,000 margin. Which trade would you prefer????!!!!

Just to emphasize, this pertains only to long term trades. If you are trading 5%- 20% swings, (like I do) it does not matter a jot whether you go short or long.

Furpy Indeed!!!

Cheers

[RichKid]

It seems some of the posts were deleted which makes my post lose a bit of context.


Wayne,
Were those recent posts? If it was a post by a poster which was edited within the editing time then we can't get em back. I haven't deleted any posts in this thread myself and I doubt Joe did either. Anyway, you've provided an excellent explanation so those posts may not be missed.

[wayneL]

Wayne,
Were those recent posts? If it was a post by a poster which was edited within the editing time then we can't get em back. I haven't deleted any posts in this thread myself and I doubt Joe did either. Anyway, you've provided an excellent explanation so those posts may not be missed.

Hey RK

I thought my first post on shorting was in response to some discussion between Tech/a and batmann which isn't there anymore.

However it is quite possible that I have become confused...probable even! :eek7:

[Joe Blow]

I thought my first post on shorting was in response to some discussion between Tech/a and batmann which isn't there anymore.

However it is quite possible that I have become confused...probable even! :eek7:

I'm pretty certain I haven't deleted any posts from this thread.

Maybe you're thinking of another thread? :confused:

[wayneL]

I'm pretty certain I haven't deleted any posts from this thread.

Maybe you're thinking of another thread? :confused:

That must be it Joe, sorry for my confusion. Its been happening ever since I stopped drinking.

:)

[RichKid]

That must be it Joe, sorry for my confusion. Its been happening ever since I stopped drinking.

:)

Maybe it's time to start again!? ;)

Nah, just kidding- I think there is another thread where you have discussed shorting. If I find it I will see if I can link it here or do something to tidy things up. Thanks for mentioning the possibility of missing threads, it's generally easy to fix things up if it's brought to our attention.

...okay here is the thread I referred to where Wayne discussed shorting previously: http://www.aussiestockforums.com/forums/showthread.php?t=1218&highlight=short+selling+stocks

I will change the title of the current thread to better reflect the discussion, I did think of merging the threads to one general thread on shorting but decided against it unless there are suggestions to the contrary.

[wayneL]

Maybe it's time to start again!? ;)



Well, been playing with amibroker. Now that kaveman has sorted my chandelier problem, I've been toying around backtesting some longer term trend following systems again. That is definately cause for a few soothing ales...but I digress.

The above discussion had be backtesting my system on the short side, just to convince myself once again. No matter how I fiddle with the parameters, I simply can't make it profitable on a portfolio wide basis, whereas the longside just s**ts it in.

Once again it is those outlyers...the few multibagger trades that push the system into acceptable profitability, the very outlyers that are impossible on the shortside because that bloody zero keeps getting in the way.

Out of interest, I would be keen to see if anyone can make a medium/long term trend following system as profitable on the short side as the long side, on a portfolio wide basis. I contend that it is not possible.

cheers

[Milk Man]

That must be it Joe, sorry for my confusion. Its been happening ever since I stopped drinking.

:)

I had to stop binge drinking because of stomach ulcers (and im 22!). I must say though that i've never felt better- now that is. The first few weeks I was worse than when I tried to quit smoking! I only used to get drunk once or twice a week so I can imagine someone with a real drinking problem quiting (dunno if you did or not) - they reckon it can kill you!

Sorry to go off topic.

So you don't reckon a medium term shorting system will work on a portfolio eh? That sounds like a challenge! I might work out a long side on the systems development thread then get back to you on that. I can make them work in the backtester- just give it crystal ball syndrome! I nearly fell off my chair when a system I tested returned 1300%

:drink: :drink: :drink: HAHAHA