Start Short Selling Basic Patterns
When a new day trader begins short selling, they are encouraged to start by adopting a basic approach. With so many day traders in the stock market, often there’s many traders adopting and promoting various patterns. This may cause new short sellers a lot of confusion. Out of thousands of patterns, courses about short selling, and endless amounts of information; how is a short seller to know which pattern is best suited to them to begin practicing short selling.
One Pattern or Multiple Patterns to Begin Short Selling
Some short selling day traders test one pattern after another endlessly to learn which works best for them. Other day trading short sellers focus on one pattern with a view of totally mastering only this. This can be overwhelming for new day traders because some patterns come and go which leaves short selling day traders waiting months for that setup to recirculate. The other new day traders that try everything are focused on so many different patterns that it can make their short selling strategy difficult to master as they are overwhelming themselves with too many ideas that they can’t comprehend at once.
One Good Way To Learn Short Selling
The best way to learn how short selling works is by focusing on one pattern at a time. This doesn’t necessarily mean that the short seller must wait months when their strategy isn’t presenting itself, it simply means that the short seller has time to learn the next pattern that is right in front of them. This is a great way for short sellers to add more strategies to their arsenal and when their original short selling strategy comes back into play, they have the experience to recognize it and refocus on their bread-and-butter setup.
A Short Selling Pattern That Can Work Year-Round
Stocks don’t only go up. What goes up must eventually come down. What does this mean? It means that every time a stock spikes for multiple days in a row the odds of the stock having a first red day become more likely. The first red day strategy is considered by many as the best short selling pattern for new short sellers because it is the most obvious, easiest to recognize and simple to practice. TradeZero helps by providing quick locates, reasonable fees and the ZeroPro Platform geared towards making a short seller’s trading more efficient.
How Short Sellers Recognize First Red Days
The first red day pattern can be seen above marked in yellow on this daily chart of $AMC capturing the end of March, 2022. You can see the multi day parabolic run followed by a day where the stock went red on the day, then followed by the official ‘First Red Day’.
As a new short seller it is best to wait patiently for the stock as it climbs higher day after day. Typically, a stock will spike at least two days in a row which is indicated as two consecutive green days with a higher amount of volume. To know if the stock is spiking for multiple days, it is wise for short sellers to check the daily chart which is easily accessible through ZeroPro by TradeZero.
Trading First Red Days
After you’ve witnessed this pattern a few times you’ll start to get more familiar and better at executing it. To avoid getting squeezed as the stock goes up, day traders can wait until the stock opens red on the day for the first time after a 100% run over multiple days. Then, the short seller is able to execute their short sell trade using risk based on the r/g level or a previous day resistance level.
Short Selling the First Red Day VWAP Fail
An added entry point that short sellers can use is VWAP (Volume Weighted Average Price). VWAP indicates whether or not the majority of traders are above or below water meaning if the candles are above the VWAP line, the majority of longs may still be in profit; if the candles are below VWAP, then the majority of long day traders are losing money. Short sellers may use VWAP to indicate another entry point after the stock has panicked on its first red day. Short sellers may see the stock wash in the morning below VWAP and begin to cover some, if not all, of their original position which causes the stock to bounce; along with, dip buyers who are ready to buy the bottom of the panics. Once the candles reach VWAP it is a good indicator that the stock will put in another top which short sellers use as their risk level and entry point causing the stock to sometimes fail again.
A Good Short Selling Pattern
Because stocks don’t typically run straight up without a red day to consolidate, the ‘First Red Day’ pattern is prevalent and often shows up in the market. It’s also recognized as one of the easier patterns for new short sellers to learn because the criteria in its simplest form is: wait for a big run (100% or more) then short the stock when it opens red.
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