Short Selling
is another type of speculative trade. It can make money in falling Market/Stock Conditions.
In this
type of trade in the spot market, traders first sell the stock by borrowing stock from their brokerage house and close their trade by buying that stock &
return that borrowed stock to the brokerage house.
Traders have
to close their short position during the Day Trading Session (Intraday) and must
return that borrowed stock to the Brokerage House. If somehow a trader is unable
to return the borrowed stock to the brokerage House during Day Session, then the trader
has to go through an auction process and have to pay some penalties. So, it
doesn’t matter that short selling trade was closed in profit or in loss,
borrowed stocks must be returned to the brokerage house.
When
traders execute Short Trades?
Traders execute
this type of trade when they thought stock is Overbought according to technical
indicators, trade near its resistance level or stock is near its down trend
line. When the Risk and Reward Ratio is favorable for short, they short the
stock.
Let’s take
an example of this:
A trader wants to short sell the MOTHERSON SUMI stock. So, That Trader open stock
Candlestick Chart on a 15 Minute Time frame, analyses the stock resistance and draw
a RED line near Price Range 247.10 rupees.
Trader identified
the possible Support level, and draw a BLUE line near Price Range 237.60 rupees
for closing the short trade or profit booking.
Then the
Traders wait for the weakness in the stock using technical indicators or price
action, when weakness have spotted in the stock near 244.60 rupees, a short
trade executed.
In the Below
Snapshot:
Step 1: Where a short trade was executed near 244.60
rupees.
Step 2: Short trade would be closed and profit booked,
Near the Blue Line, with Return or Reward of 2.85% If Price reaches at 237.60 Rupees
level.
Step 3: Somehow, if the Market Dynamics Change and the stock move upward direction instead of going down then the RED Line, near
244.60 Rupees, would be the Exit mark from the trade with 1% loss or with 1% Risk.
So, the Risk
to Reward Ratio of that Short Trade would be 2.79 approx.
Calculation
of Risk to Reward Ratio is a must in any Trade.
