Tag: trading

Shorting, also known as short selling, is a trading strategy that involves selling a borrowed asset in the hope of buying it back later at a lower price. Shorting can be used to profit from falling prices, hedge against downside risks, or speculate on market movements. However, shorting also carries significant risks and challenges that traders should be aware of before entering a short position. In this article, we will explain the basics of shorting, its pros and cons, and some common shorting strategies.

How Does Shorting Work?

Shorting is the opposite of buying or going long on an asset. When you buy an asset, you expect its price to rise and sell it later for a profit. When you short an asset, you expect its price to fall and buy it back later for a profit. To short a stock, you need to borrow shares from a lender, usually a broker-dealer, and pay a fee or interest for the loan. You then sell the borrowed shares at the current market price and receive the proceeds. At some point, you have to buy back the asset and return it to the lender. If the price of the asset has dropped, you can buy it back for less than what you sold it for and keep the difference as your profit. If the price of the asset has risen, you have to buy it back for more than what you sold it for and incur a loss.

What Are the Benefits?

Shorting can offer several benefits to traders and investors, such as:

• Profit from falling prices: Shorting allows you to make money when the market is bearish or when a specific asset is overvalued or in decline. For example, if you believe that a company’s earnings will disappoint or that its stock is in a bubble, you can short its shares and profit from its downfall.
• Hedge against downside risks: Shorting can also be used to protect your portfolio from potential losses or reduce your exposure to a certain sector or asset class. For example, if you own a long position in a stock that is correlated with the overall market, you can short an index fund or ETF that tracks the market and offset some of your downside risk.

Shorting also involves significant risks and challenges that traders should be aware of before entering a short position, such as:

• Unlimited downside: Unlike buying an asset, where your maximum loss is limited to your initial investment, shorting an asset exposes you to unlimited losses if the price of the asset keeps rising. There is no limit to how high an asset’s price can go, so your potential loss is theoretically infinite.
• Short squeeze: A short squeeze occurs when a large number of short sellers are forced to cover their positions due to rising prices or margin calls. This creates a positive feedback loop that drives the price even higher and squeezes more short sellers out of their positions. A short squeeze can be triggered by positive news, strong earnings, analyst upgrades, or other factors that boost the demand for an asset.
• Stock loan fees: When you borrow an asset from a lender, you have to pay a fee or interest for the loan. The fee depends on the availability and demand for the asset, as well as the broker’s terms and conditions. The fee can vary over time and eat into your profits or add to your losses.
• Margin requirements: To open a short position, you need to have a margin account with your broker and meet certain margin requirements. Margin is the amount of money that you have to deposit with your broker as collateral for your short position. The margin requirement depends on the broker’s policies and the volatility of the asset. If your account value falls below the margin requirement, you will receive a margin call from your broker and have to deposit more money or close your position.

Implementing shorting strategies

There are many ways to implement shorting strategies depending on your goals, risk tolerance, and market conditions. Some common shorting strategies are:

• Selling a bounce in a downtrend: This strategy involves selling an asset after it has bounced from a lower low in a downtrend and waiting for it to resume its downward movement. This strategy requires identifying the trend direction, support and resistance levels, and reversal signals.
• Entering within a trading range and waiting for a breakdown: This strategy involves selling an asset that is trading within a range-bound market and waiting for it to break below the lower boundary of the range. This strategy requires identifying the range limits, volume patterns, and breakdown signals.
• Selling into an active decline: This strategy involves selling an asset that is already in a sharp decline and riding the momentum to the downside. This strategy requires identifying the catalysts, trendlines, and exit points.

What to expect from the introduction of shorting to the PSE

Shorting brings two big benefits for the Philippine market. First is that it’s possible for the market to experience an inflow of liquidity. Given that shorting requires a a lot of activity within stocks, it’s possible to see volume increase among shortable stocks.

Second is that traders can now profit from breakdowns. The benefits here are obvious and don’t need to be explained. However, something traders have to realize is that shorting isn’t as easy as it seems. Yes, the PH market may have been slumbering, but there’s a big difference between stocks having no significant movements within a range versus stocks crashing. You also have to consider that risk-reward ratios are different when you’re shorting.

As always, being systematic is the most crucial part towards profiting from the markets. The introduction of shorting is just another tool that we can use to do so!

Trading is an activity that can be rewarding, exciting, and challenging. Trading is also considered to be the hardest game in the world. However, it also requires time, attention, and discipline. For many people, finding the time and energy to trade can be difficult, especially if they have a busy lifestyle. 

How can one fit trading into a busy schedule without sacrificing their quality of life? Here are some tips and strategies that can help.

Choose the right market and time frame

One of the first steps to fit trading into a busy lifestyle is to choose the right market and time frame that suit your availability and preferences. Different markets have different characteristics. Each one has its own unique amount of volatility, liquidity, trading hours, and fees. For example, the forex market is open 24 hours a day, five days a week, and offers low transaction costs and high leverage. However, it also involves high risk and requires constant monitoring of currency movements and news events. On the other hand, the stock market is open only during specific hours, depending on the country and exchange, and offers a wide variety of instruments and sectors to choose from. However, it also involves higher transaction costs and lower leverage.

Similarly, different time frames have different implications for trading. For example, trading on shorter time frames, such as minutes or hours, requires more frequent analysis, entry, and exit decisions, as well as more stress and emotional pressure. On the other hand, trading on longer time frames, such as days or weeks, requires less time and effort, but also less opportunities and slower returns.

Therefore, you should choose the market and time frame that match your goals, risk tolerance, personality, and schedule. For instance, if you have a full-time job that occupies most of your day, you may want to trade on longer time frames in the stock market or the forex market during off-peak hours. If you have more flexible hours or work from home, you may want to trade on shorter time frames in the forex market or the futures market during peak hours.

Plan your trades ahead

Another way to fit trading into a busy lifestyle is to plan your trades ahead of time. This means doing your homework before the market opens or after it closes, depending on your chosen time frame. You should conduct your technical analysis, fundamental analysis, news research, and risk management to identify potential trading opportunities, entry points, exit points, stop-loss levels, and position sizes ahead of time. You should also have a trading plan that outlines your trading strategy, rules, and objective – all of which should be in sync with the time and effort you can realistically give.

Planning your trades ahead can help you focus on just executing the trades onces the opportunity appears. It can also help you stay focused and disciplined on executing your trading plan without being distracted by market noise or external factors.

Use Technology Wisely

Technology can be a great ally or a great enemy for traders who have a busy lifestyle. On one hand, technology can help you access the market anytime and anywhere through various devices and platforms. You can use online brokers, trading software, mobile apps, alerts, signals, indicators, charts, and other tools to facilitate your trading process. You can also use automation tools to execute your trades automatically based on predefined criteria.

If automation isn’t suitable for you, alerts can be the better alternative. Even when you’re in the office or somewhere else, alerts will help you find out if significant moves are happening in the market.

Is it possible to trade successfully while being a busy person?

The answer is most definitely yes! Many well renowned traders have achieved success even as they have other responsibilities to attend to. The Market Wizard Tom Basso perfectly explained it in the Investa Summit 2023 that trading doesn’t need to be all-consuming. According to him, the best strategy will always be the one that you can execute based on your circumstances. Finding that strategy means figuring out what your edge is in the market, and developing a set of rules that will help you turn it into profits.

An index is a collection of securities that represent a certain market, sector, or asset class. For example, the $PSEi consists of the top 30 companies in the Philippines. On top of this, it aims to reflect the state of the economy. However, since a lot of things can happen over a span of time, index rebalancing are done in order to better reflect economic progress.

What is an Index Rebalancing?

First of all, an index is made when stocks are bundled together. These stocks are called the constituents of the index, and the index aims to track the price changes of the entire group.

Index rebalancing refers to adjusting the weights or composition of the securities in the index on a regularly scheduled basis. The frequency and method of doing so depends on the type of the index. For the Philippine index, the goal is to track the biggest 30 companies with adequate representation from each industry. The index also takes into account the free-float of the stock. The $PSEi usually rebalances stocks. An index rebalancing of the $PSEi is done as the free-float adjusted market capitalization of stocks change. 

Why is an Index Rebalancing Important?

Index rebalancing is important for several reasons:

• It ensures that the index reflects its intended market segment or investment theme accurately and consistently over time.
• It prevents the index from becoming too concentrated or skewed towards certain stocks, sectors, or regions that may have performed well or poorly in a given period.
• It reduces the tracking error and improves the performance of index funds or exchange-traded funds.
• It provides opportunities for investors to buy low and sell high by rebalancing their portfolios in line with the index changes.

What are the Challenges of Index Rebalancing?

Index rebalancing also involves some challenges and costs, such as:

• Transaction costs: Rebalancing requires buying and selling securities for funds, which incur commissions, bid-ask spreads, and market impact costs. These costs can reduce the net returns of the index and its followers.
• Market timing: Rebalancing can cause price distortions or volatility around the rebalancing dates due to increased trading activity.
• Information leakage: Rebalancing may reveal information about the index composition or methodology to other market participants, who may exploit it for arbitrage or front-running purposes.

How does this affect your portfolio?

If you are an investor in the Philippine stock market, the biggest thing you have to take into account is that price action will often be affected by impending rebalancings. Before the announcement, stocks that are about to be dropped tend to sell off even before the news comes out. Likewise, stocks that are about to be included can experience increased buying. The adage “buy the rumor, sell the news” often comes true with rebalancings locally. As such, make sure to pay close attention to how prices move as an index rebalancing nears,

Your trading or investing activities shouldn’t revolve entirely around them, but paying attention to them could help you save money from some losses, or even take advantage of bullish price action!