For a momentum trader, this market has been nothing short of a blessing – we get multi-fold runners every week, at times even on a daily.
I am a Raging Bull, so it’s only fair that I prefer to be on the long side of these moves – that’s just my personality.
But needless to say, there’s a TON of meat on the bone shorting the irrational overextended names.
Every big reward involves big risks, though, and risks in parabolic squeezers grow exponentially.
Today, I’d like to give you some tips on how you can short the GMEs and AMDs of this world better, safer, and more efficiently.
I talk about confirmation quite a lot because I truly think it makes a big difference to my results.
Confirmation is not some specific chart pattern… rather it’s a concept – something notable in a stock’s price action that gives you reasons to believe a move is about to happen.
Its purpose is simple: to convert your thought process from “The stock has to go up/down” to a logical and sensible “This just happened and validated my idea, so I’m ready to make a trade.”
As you figured, shorting a name that’s likely up many folds in a matter of weeks, days, or even hours is tricky business – if such a trade goes wrong it may potentially wipe out your entire account.
In my view, waiting for confirmation is the most crucial part of shorting a high-flyer.
Some of the classic confirmation setups are:
1. Open lower after a “blowout” move:
2. A failed break higher from consolidation at the highs:
3. Failure to hold at the highs:
It’s not limited to these three, though.
The way I like to look at it – confirmation is anything that hints the up move has exhausted.
Only when you see a runner obviously “not wanting to go higher” anymore, that’s when you should be looking to get short.
Otherwise, you risk getting run over on the front side.
Don’t Get Stubborn
Big short squeezes happen for one simple reason – short traders are too stubborn to admit they’re wrong and get really mispositioned.
I bet we’ve all been in a situation when something is clearly not working as you anticipated, yet in your head, you hear “this doesn’t any sense, it just has to go up/down.”
I doubt many of these trades worked well and if you continue to trade out of bias, well, I got some news for you – this is exactly the kind of behavior the market doesn’t forgive.
The truth is, you may have the best research and every solid reason on your side, but if the market disagrees with you – you may find yourself in the hot waters.
The key part of the trading process is to trade what you see, not what you believe.
When a stock is an obvious sham but the chart keeps grinding higher – it’s not because the market is wrong, but because for whatever reason the supply-demand dynamic is bullish at the moment. And you better take notice!
Don’t “facilitate” a short squeeze and never let an irrational name take you for a ride. You can always…
Exit and Re-Enter
You can always come back later!
Don’t forget that trading is a game of numbers – you don’t have to win every single time!
It is ok to admit your setup is not working and get out for a loss – actually, in most cases it’s the best thing you can do.
You can always re-evaluate your thesis and re-enter later when the setup becomes favorable again.
Don’t get stuck stock short in a momentum name that keeps moving up for no good reason – know where your “I’m wrong” level is, cut the loser quick and small, and patiently wait for the next good opportunity.
I’ve just spoken about patience when entering the trade – now is the time to talk about patience when holding.
Look, holding onto a winner is a lot harder than holding on to a loser.
When you’re down, you look for excuses to stay in. When you’re up, you often look for reasons to get out quickly and put the money in your pocket.
Well, in a perfect world, it should be the other way around.
A name that’s truly overextended in a short period of time will have a lot of ground to give when the backside finally kicks in – it is your job to make the most of it.
Let me give you an example – here’s the chart of GME following its famous (or infamous) squeeze:
Even if you shorted in the $150s, following a mind-boggling drop from $300-$500, you still had the stock go nearly 70% lower, into $40s, just 2 weeks later.
You should obviously control your risk and exit when you feel its appropriate, but maintaining your short positions in “crazy” names for as long as possible can be good opportunities – many of these tend to go right back to where they came from.
Don’t settle for the first few red candles, let the unwind truly play out.
Shorting a high-flyer presents some of the greatest opportunities out there, but the stakes are high.
I try to stay very careful when doing so and, if you’re new, avoid such trades altogether.
But if you do go for it – I hope these tips can make life easier and safer for you.