My 8-Point Guide to Short Selling

Hi, I'm Apurva Sheth and I welcome you to this latest edition of Fast Profits Daily.

Markets across the world have been falling left, right, and centre Most stocks are falling much more than the benchmark indices.

Now, traders have found themselves in a very unique position. They have simply freezed in action just like a deer would in front of a speeding cars headlights. Most traders are generally used to buying stocks first and selling them later for a profit.

However, in a current market environment that is not possible. Stocks are simply falling like a pack of cards and if you want to make money in such markets, then you have to do the exact opposite, i.e. selling the stocks first and buying them later. This is called as short selling.

Short selling requires a different set of skills and huge capital. So today, I am going to talk about the skills that are required to short stocks.

So now I am going to take you through seven or eight criteria, which I normally look at before identifying stocks that could drop.

What are these criteria?

First and foremost is that the stock has to be amongst the futures and options segment. So if a stock is in the futures and options segment, then you can carry forward your short positions and if the stock is not in the futures segment then you will have to square up your positions at the end of the day before the market ends.

There are about 140 stocks listed in the F&O segment on the National Stock Exchange. So this is the first filter that one has to apply.

Second, this is more about the fundamental aspect of the company. So the second element is promoter holding. If the promoter holding in the stock is low, then that stock is more vulnerable for a fall. The simple reason is that if the promoter does not have skin in the game, then who else will?

If the promoters are not interested in running the company, then there are chances that the company will lose focus and will eventually and into losses. So that the second element that one should look at.

The third criteria. The third thing is promoter pledging. Now, I would in fact, rate promoter pledging as even more important and promoter holding in the company.

So if the promoter has a good stake in the company but most of these stocks are placed with the financial institution. Promoters pledge their shares to borrow money from financial institutions and they use this money to invest in the company or for their own personal reasons.

So for whatever reasons, they might have pledged these shares but if the pledging number is high, then chances are that the company will sooner or later fall. So promoter pledging is another criteria that one should look at.

Fourth thing is recent quarterly results. Now, if the company's recent quarterly performance has not been up to the mark, then that is another warning sign that the stock may fall. So one could prepare a list of stocks, which has delivered good set of numbers and there can be another list of stocks where the companies have not delivered a good set of results.

Now this could probably act as a basket where you can identify stocks for shortening. So a poor set of numbers is another element that one can watch out for.

Now, the remaining elements are more on the technical side. What are these?

The fifth criteria is stocks falling with rising open interest. If you are not into derivatives then you might have not heard the word open interest.

Open interest is nothing but the number of outstanding positions in a particular stock.

So if if the stock has fallen in the recent past with rising open interest, then that is an indication that more and more people are getting into this stock and they are short selling it. So this is another criteria that one can look out for. If the stock falls on rising open interest, then that is a sign that more and more people are getting active into the stock and it could fall.

The sixth thing is a weak relative strength. Now relative strength is in terms of the markets or the sector that the stock is from. So let's say the stock that you are looking at is a banking company.

Now, if the stock is falling more than the Bank Nifty, then that is an indication that it is amongst the weaker stocks. On the other hand, if it falls more than Nifty or Sensex then that is also an indication that the stock is among the weaker ones.

You might have noticed this. If the lion is on a hunt, then who will it catch first? It will obviously catch the deer, which is the weakest or the oldest. The same rule applies even in stocks as well. So the weaker ones are the more vulnerable for a fall.

Another aspect that one can look at is the monthly RSI. Now RSI is the relative strength index, which is the momentum indicator. Now if the monthly RSI is below 40 then that stock is in a bear market.

One can use other indicators, like the 200 DMA. If the stock is below the 200 DMA, then that means that the stock is in a bear market as well.

So there are various indicators that one could use, to identify stocks which are in which are in a bear market. I prefer to use the monthly RSI and the level is 40.

And finally, the last thing that one can look at is if the stock is trading near 52-week lows or near all-time lows.

What does trading near 52-week low mean? It means that the stock is actually very weak, not only in terms of its fundamentals but also in terms of its technicals as well.

Such stocks are more vulnerable for a fall. So if the stock is already at a 52-week low or an all-time low, then that means the chances of it taking support are at the lower level are less. So there can be a possibility of a free fall.

So these are the eight things that I prefer looking at. Obviously, apart from these, there are chart patterns as well and these chart patterns also help in identifying stocks which are likely to fall but broadly, these are the eight things that one can look at to identify stocks which are most vulnerable and could fall soon.

I hope you enjoyed watching this video and I hope this also helps you improve your trading and it adds value to your trades as well.

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Thanks a lot and have a nice day.