Golden rules are really special rules that you should always keep in mind and do not forget. These are very important and useful guideposts to keep us on course and headed in the right direction.
When you define your goals, begin looking for the key rules that connect with it. Chart your course by these investment principles and let them steer you to achievement and success.
Here are 5 of the most useful Golden Rules that apply to short selling stocks.
Golden Rule # 1, Do not short stocks based on valuation alone.
The tried and tested reason for carrying it out like this is that momentum can rule the day for many months and even years. Especially in a speculative market, valuation can be ignored for long periods of time. Remember,“the market can stay irrational longer than you can stay solvent“.
Golden Rule # 2, Look for a catalyst.
It’s best to handle this carefully because stocks can levitate in the absence of bad news. Make sure you understand that you should have a catalyst as part of your short thesis. Is there fraud that will be revealed? Will the company likely miss revenue or earnings estimates in the coming quarter? You need some piece of bad news that will most likely drive the stock lower.
Golden Rule # 3, Study the short interest of your targeted stock.
You can find reasons you should do this carefully. It’s important because a crowded short can create extremely painful squeezes. For example, even some of the most successful hedge fund managers such as Steve Cohen and David Einhorn lost major money when Porsche stock rocketed in a matter of days.
Golden Rule # 4, Be Contrarian.
If you would like you could get this done by looking at investor sentiment, the put call ratio, or simply observing whether mainstream media is unanimously bullish about a stock. However, you should remember that you need more than fundamental analysis to have a successful short. You also need to anticipate when the bullish longs may start to fear their positions and rush to the exits.
Golden Rule # 5, Don’t short if you are an amateur investor
Ways to accomplish this step include using put options instead of outright shorting. Shorting stocks involves the potential for unlimited losses and only professionals should engage in shorting. You will need to accomplish this carefully. It is an entirely different skill set to be able to analyze the value of put options.
Have confidence and believe in these Rules to short selling stocks. They’ve been time-tested and have absolutely been proved to be true. Follow them carefully and then your ultimate success will likely be assured and your satisfaction greater.
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