Short Interest Ratios And Short Selling Secret
Everyone wants to ride the rising tide in the stock market by buying stocks and later on selling them at a higher price to make a capital gain. However, can you make money when the tide in the stock market is going down? Yes, you can with short selling. In short selling, yo borrow a stock from your broker and sell it. Later on you buy it back at a much lower price and return it your broker making a good capital gain.
Short selling works if the price continues to fall. If the price does not fall or retraces after sometime, you can make a hefty loss on your short position. The loans that are taken in order to go short have to be repaid! If the lender asks them or the price goes up, the trader has to buy back shares in order to make the repayment. Now, the harder it becomes to get the right number of shares in the market, the more desperate the trader will become and the higher the prices can go.
Now, in other markets like the currencies, futures or the options market, you don’t have to borrow the security in order to go short. You can straight away go short by selling that security or currency in the market. Now, short selling in stocks is done by investors with the expectation of a making a capital gain when they expect that stock price to go down in the near future. Short selling is also done by the fund managers to hedge their stock portfolios.
There is something very important that you need to keep an eye on when you go short selling. It is known as Short Interest Ratios. This will help you monitor the rate of short selling in the market. If the rate is too high, it means that too many investors are taking short positions and you need to avoid it. New York Stock Exchange (NYSE) and NASDAQ, both report the short interest in stocks listed on them,however, this is done on a monthly basis as brokers need sometime to collect the data of shares that they have lended to their clients for shorting.
Too much short selling can only drive the stock price down. Short Interest Ratio is very important for short sellers. Short Interest Ratio can give you important clues about other short sellers in the market.
So what is the Short Interest Ratio? Short Interest Ratio is the number of shares of a particular stock that has been shorted in the market. It also reports the percentage change in the short positions from the previous month. Plus the average daily volume for that stock in the same month and also the number of days of trading at the average volume that it would require the market to cover the short positions in that stock.
A high short interest ratio should make you nervous if you have taken a short position in that stock as most of the investors who are short will soon become desperate to dump that stock in the market and cover their short positions. The problem with Short Interest Ratio is that it is not calculated frequently. It is calculated on monthly basis. So, the trader cannot use it to gauge the short positions in the market on a daily or weekly basis. However, it can give you the general trend in the market.
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Profitable Candlestick Patterns-The Bullish White Marubozu-Bullish White Long Candlestick!
Candlestick Charting is the best tool in the trading arsenal of an experienced trader. There are two type of candlestick patterns-Bullish or Bearish. The most bullish of the candlestick patterns is the long white candle. When this candlestick pattern is formed, it means that the bulls have been in total control of the market throughout the trading day.
As prices rise through the day, sellers do come in but not enough to stop the prices from continuing to rise. When sellers do show up during the trading day, buyers buy from them and the prices move higher.
This is an indication that the buyers are not done with their buying. The following day the bulls will still be in control and pushing the prices further higher. This is an indication of the fact that there are not enough stocks or securities in the market to satisfy the buying appetite of the investors. With high demand and low supply, the prices will continue to rise! Now, what this means is that prices have been constantly rising throughout the trading day. The closing price was equal to the high of the day or very near the high of the day.
In case of a true white Marubozu, the opening price is equal to the low of the day and the closing price is equal to the high for the day. Now, this might occur occasionally. For our purposes, a white candle may have some wick on its both ends. What this means is that the opening price in case of a long white candle will be close to the low of the day and the closing price will be close to the high for the day.
How do you know that this is indeed the white long candle? You wil find many bullish white candles on the chart. Off course, everyone will not be the white long candle. When you find that 90% of the area between the low and high of the day is covered by the candle body, you know that this is indeed a long white candle.
On a long white candle day, a lot of price action is covered by a very short amount of time. Price action doesn’t move in one direction for that matter without retracing some part of it. This normal retracing of the price action gives you a chance to act on the signal provided by the bullish long white candle.
Now when you trade the bullish long white candle, you can take the low price as the support. This is the price level where the buyers step in thinking that the price is good now and start pushing it higher.
There are some variations to the bullish long white candle. Three are very important. The first is the Long White Marubozu that has no wick. It is all candlebody. This is the most bullish of the candlestick patterns. The second important variation is the Opening White Marubozu. In this case, the open price is equal to the low of the day. What this means is that the there is no wick below the candle body. The other variation is the Closing White Marubozu. In this case, the closing price is equal to the high of the day. What this means is that there is no wick on the top of the candlebody.
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Trading Interest Rate Futures And Knowing The Yield Curve
Interest rates are very important for the economy as well as the businesses. No matter what business you do, interest rate changes can have an impact on your business. No matter what you trade-stocks, forex, futures, commodities, ETFs, options, bonds or anything else, you need to keep an eye on the interest rate changes. Now, there is not one interest rate in the economy. There are many. Some are short term while others are long term. A Yield Curve helps you understand the changes in the different interest rates in the economy!
You will come across three types of shapes on the yield curve. The normal curve rises to the right and the short term interests are lower than the longer term interests. A normal yield curve represents normal economic activity where investors are being rewarded more for investing in longer term securities with a premium on longer term interest rates.
When you find the Yield Curve to be Flat, it means that all the interest rates in the economy are equal. What this indicates is that economic activity is slowing down. Now, most of the time you will come accross the Normal Yield Curve. But sometimes, you will find the Yield Curve to be Flat.
However, when the economy starts to go into a recession, you will suddenly find an Inverted Yield Curve. On an Inverted Yield Curve, the longer term interest rates are lower than the short term interest rates.What this mean is that the economy is slowing down and investors are reluctant to invest long term thinking it to be risky. An Inverted Yield Curve is a leading indicator of an economy doing down into a recession. When there is a financial crisis like that happened in the early part of 2008, you will find the Yield Curve to be Inverted. Investors are shying away from investing in long term projects in the economy.
Many investors and traders trade interest rates by investing in Eurodollars. Eurodollars are short term futures contracts that have a low margin requirement meaning retail traders and investors can also trade Eurodollars. Eurodollars have a highly liquid market meaning you can get in and get out without paying a large spread due to the large market in them. They also have less volatility. However, you can also trade the 10 year Treasury Notes (T Notes) and the Treasury Bonds (T Bond) that have a maturity period of higher than 10 years. However, T Notes and T Bonds have a much higher volatility as compared to Eurodollars.You can also trade options on these interest rate futures contracts. Some people trade the volatility. So, you have to know what you want before you trade these instruments!
Trading interest rate futures is no different than trading anyother futures contract. If you haven’t traded futures before, a good idea would be to first paper trade these contracts for at least two months so that you get a feel of how these futures contracts gets traded and how the market behaves! Now, when you trade these interest rate futures contracts, you need to keep an eye on the market constantly. Futures trading can be risky and in a matter of few minutes you might get wiped out in the market and get a margin call from your broker.
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Shocking Stocks Short Selling Facts!
Short Selling Stocks is one of the favorite day or swing trading strategy. Many traders short stocks. Now many stock brokers make it very easy for the investors and traders to short stocks. Now a days, most of the trading is being done online. When you sell a stock, a message will ask you whether you are selling stocks that you own or you are selling short. With one click, you tell the broker that you are short selling. The broker than goes about and arranges the shares for you to short sell. These shares are a loan to your account.
In some cases,a stock gets so much shorted that there are no more shares of that stock left for you or your broker to borrow anymore. Now, you cannot always short a stock instantly. Most of the investors work on rumors. In that case, you simple will have to cross your fingers and see how the other short sellers do on that stock while you search for another stock to short!
Day traders are not looking for long term fundamentals in order to go short. A day trader might go short on a stock that had go up for three consecutive days, figuring that they will go down on the fourth day. Day traders are only looking for stock that might go down in price for mundane reasons.
In simple words, once the stock starts to move down, you cannot short it. You will have to wait for its price to move up on the last trade, before your short selling order can be executed by the broker. Now, you cannot straight away short a stock as there are mechanisms in place employed by msot of the stock exchanges that don’t want a massive shorting attack on a stock. There is the famous Uptick Rule that has been put in place to prevent that from happening. What the Uptick Rule means is that you cannot short a stock unless it moves up on the last trade. This rule has been placed to prevent a stock from being driven down to almost zero by short sellers.
Now you have to be careful when shorting a stock as certain risks are involved. In theory, there is no limit on how high a stock price can go high. So when betting on something going wrong, if you yourself go wrong, the potential loss in case of a stock price going up can be immense.
Know something known as Short Squeeze. Once that happens, almost all short sellers get desperate to dump their stocks and exit but when they try to buy back the stock, they get more hurt as the prices go even higher and higher on rising demand for the stock in the market. Now, don’t get caught in the market with short selling when good news spreads about the stock that you had shorted driving its price up.
If you have already shorted that stock, you might get a call from your broker to return that stock immediately. In such a case, you will have to immediately return the stock even if it doesn’t make any sense to you!As said before, companies, investors and many brokers hate short sellers. They think that short sellers had intentionally driven down the stock prices. So sometimes, they will spread rumors of good news to create a momentary short squeeze. Sometimes, a campaign will be started by the owners of a particular stock instructing their brokers not to loan out their stocks to short sellers.
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Doji Candlestick Pattern-Rare But Easy To Spot And Highly Profitable!
A Doji Candlestick Pattern is formed when the opening and the closing prices are the same. So, there is no stick on the candlestick. There are some variations but essentially a Doji is almost all wicks with no body. A Doji looks more like a cross rather than a candlestick pattern.
In other words, the opening and the closing prices should be the same for a Doji to be formed. So for a Doji to be truly formed on a trading day, throughtout the trading day heavy buying or selling may take place but at the end of the day, the price should be where it had been at the start. In other words, the opening and the closing prices should be the same for a Doji to be formed.
It is a signal that the battle between the bulls and the bears had been a draw during the trading day when a Doji is formed with the opening and the closing prices equal. Soon, either the bulls or the bears are going to previal. In other words, a trend reversal is about to take place.
A Dragonfly Doji pattern is unique in the sense that the opening, closing and the high prices are all the same or equal. A Dragonfly Doji is formed when the stocks opens, trades down during first part of the day. During some part of the day, the price starts to climb again and eventually closing on the high which is the same as the open.
So when a Dragonfly Doji Pattern is formed, the bears had been in control of the market at the start. But at some point in the trading day, the bulls become active and step in. Bulls start buying. This takes the prices up and at the end of the day, the security price ends up right where it had started. In other words, the open, the close and the high for the day are the same.
Dragonfly Doji is considered to be a bullish candlestick pattern. The low on this pattern can be taken as the support level because this was the level at which the bears entered the market and started buying.
When a Bearish Gravestone Doji Pattern is formed, it is a signal that a prolonged downtrend is about to start in the market. The second important variation to the Doji is the Bearish Gravestone Doji. This pattern is formed when the open and close of the day is equal to the low of the day. This is something opposite to the Dragonfly Doji where the open, the close and the high were equal.
As said before, this pattern is rare but very easy to spot on the chart. When it does form, get ready for a trend change!
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