Re: 8-9% rise in XJO index can this be overbought ?
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