Going Long vs. Going Short by Zvi Benyamini
There’s a world of difference between uptrends and downtrends. Here’s a look at different setups and how you can use them to succeed in long and short positions.
When I first began selling short a few years back, I didn’t do very well. I was stopped out of trade after trade, and I kept missing out on the best opportunities. At first I didn’t understand what was wrong: I was using the exact same methods that I had used successfully to go long, and simply reversed the rules and setups. Why wasn’t it working?
At some point I realized this was a mistake. Why? Because if you examine the charts of uptrends and downtrends carefully, you will see a world of differences between them. Understanding these differences is crucial to successful short-selling.
I would like to demonstrate a few of the differences between common chart patterns in uptrends and downtrends. I will show how they affect my entry setups, stop placement, and profit-taking when going short, compared to going long.
#1: DOWNTREND PULLBACKS ARE DEEPER
In an uptrend, pullbacks are usually weak and shallow compared to the rallies. Pullbacks in downtrends, on the other hand, tend to be much stronger and deeper.
So if we try using the same entry rules for going short on pullbacks, we are likely to miss out on the best trades. We need two different sets of entry rules: one for buying pullbacks in an uptrend, and one for shorting pullbacks in a downtrend. The “buying rules” should avoid strong pullbacks, while the “shorting rules” should allow them.