Short Swing Trading – More Diversification, Less Risk and More Opportunity
Many traders even some very experienced traders tend to focus only on the long side of the market. The primary reason why short selling or short swing trading isn’t very popular is because traders don’t feel that it’s very natural and anything that’s confusing is typically avoided. One of the first things I do when teaching a workshop is offer traders some short selling exercises so that the activity becomes second nature. Once you begin selling short it becomes a natural part of the process and everything falls into place. When I pick stocks I give no relevance to trading the long side or the short side, it makes no difference to me either way. I don’t even think it affects me on any level at this point.
There are several benefits to short swing trading; when markets are going down, they typically move 3 times faster than when they rally. The reason for this is simple. Fear is a stronger emotion than greed; when markets are rallying greed drives the market and when markets are falling fear drives the markets. You can get a good idea of what I mean by looking at this chart.
Many trading books don’t discuss this but if you notice most stocks and other financial markets you will notice that short market swings are several times stronger and carry much more volatility than rising markets. Remember, it’s all about fear when markets are dropping fast.
The second reason why short swing trading is very important is because it offers you tremendous diversification and potential hedge against your long positions. In simple terms, even when you trade uncorrelated positions, there still remains some correlation to the general market.
Therefore, even when you trade unrelated markets there will still be some buffer between your long positions and your short positions. This will be the case unless you are trading markets that are totally unrelated for example trading corn on one exchange and trading stocks on another exchange may not provide this correlation, but if you are trading markets on the same exchange for example the stock market, there will be some degree of correlation between your long positions and your short positions, this will help offset some of the loss you incur from your long position at worst and at best offset your loss by a high margin.
Either way you look at it, trading to the short side will offer your account some degree of diversification and protection that you won’t find elsewhere in the market. Many traders believe that diversification will spread risk between positions, this is true to an extend but there’s no better diversification and risk control than trading both sides of the market.
In the next few weeks I will do a more detailed tutorial and offer some specific trading methods that will help you develop good short swing trading habits.
For more on this topic, please go to: Stock Swing Trading For Beginners – Swing Trading Tips and Easy Swing Trading Strategies – Swing Trading Tips