Stocks: The Long and Short Of It

When we think of spread betting, stock trading is usually the first thing that comes to mind.  But it should be known that not all stock trading involves buying stocks.  Short selling gives spread betters the opportunity to profit from declines in stock valuations, so this is a strategy that should be considered whenever the outlook for a given company starts to deteriorate.  To be sure, most spread betters specialize in either long or short positions.  But there is nothing wrong with using both approaches as part of a broader strategy.  Here, we look at when a trader should be looking to buy or sell a company’s stock.

Long Positions -- The Bullish Stance

 

Most spread betters consider stocks from the positive (bullish) position.  This makes a good deal of sense given that most stocks rise in value over time, and those that mostly take long positions can capitalize on these trends.  But since most stocks live in ‘uptrends,’ these traders will need to wait for the right opportunities to buy while the asset is still cheap.  This is where the old trading adage ‘you must buy low, and sell high’ originated.  Ideas like this might seem obvious but the real trick is to identify areas where these opportunities can be found

 

To accomplish this, spread betters need to watch for discrepancies between short-term expectations and the long-term outlook.   Disruptive effects like a negative quarterly earnings report can create short-term dips in price that are attractive for longer-term bullish positions.  So, when the long-term outlook looks good for a company, buy positions should be initiated during times when short-term uncertainty is the prevailing theme. 

 

Short Positions -- The Bearish Stance

 

Unfortunately, no stock can move in the upward direction all the time -- and it makes sense to watch for instances where stock values are likely to drop (begin in a bearish trend).  Short selling is suitable for spread betters with a more aggressive stance.  Are you not impressed with the current product line at a given company?  Does its management appear unprepared in media interviews?  Is that company’s P/E ratio above its industry competition (an indication of overbought market behavior)?

 

This would suggest it is time to start thinking about short positions.  In these cases, the ‘buy low and sell high’ adage is not your friend.  Here, you will want to start seeing some downside on the charts:  A short seller’s best friend is the rally.   This is the area where you will make your best profits, and encounter the fewest risks.  These are the areas where you are going to capitalize on the market’s ‘irrational exuberance’ and put your risk-to-reward ratios in your favor.  Since downward momentum tends to be more forceful, your chances to sell high will occur less often.  This is why short selling is better for those with a more aggressive mindset.  The opportunities are still there, but you will need to be quicker to jump on them as they happen. 

 

Conclusion:  Markets Do Not Move In One Direction

 

Anyone that has seen a chart of any kind knows that it never moves in one direction.  Spread betting involved a push and pull between buyers and sellers that will exist until the end of time.   This means there are opportunities to benefit from rising and falling markets.  Use the available information to make bets ‘for or against’ an asset.  Most tend to side with one side of the game but there is nothing to limit you here if you start to see an opportunity against the rest of the market’s expectation.