A: Answer by experienced trader MTG. Nothing sophisticated. Every now and then I sit down and visually skim through the charts of the thousand biggest stocks (using Sharescope Gold, viewed offline).
My primary setting is an 18 month line chart, overlaid with simple Moving Averages 20, 50 and 200, and the sector index line. Beneath it a volume indicator and an RSI (basic 20 Wilder, which is Sharescope's default offering). Initially it's just the visual shape of the price line I'm looking at. If something catches my eye (eg: SAND) as appearing to be on a downward path, I toggle between the standard linear chart and the semi log version, then look at my two other chart set-ups (a 3 month candlestick chart and a longterm line chart). Both are overlaid with the same 20/50/200 moving averages (again I toggle linear/semi log viewings).
I take note of obvious support and resistance levels. I could set up twelve chart settings per stock, but I lazily use just these three. I could also set up a whole host of other technical analysis indicators - and probably should.
I then glance at the company's website to see what they do and who runs it all. Then at bulletin boards and forum comments, and at any recent news, and at any imminent key dates. I cast an eye over a couple of the basic metrics (projected earnings per share growth, PE ratio) but for most fundamentals, debt problems, imminent restructurings, etc, I just eavesdrop on forum discussions. I might also Google the company's name or product, to see what the non-financial media are saying.
If I fancy downbetting on it I mostly use quarterly bets, with non-guaranteed trailing stop losses attached, and I vary the stake depending how things are going (banking some gains at times, increasing my stake at other times).
If a downward run ends I get off that one and find another. I do much the same when looking for upbets.
Some mornings I log onto my news desk looking at 7am company announcements, and might day trade a stock or two based on news - having done a quick search to see the stock's recent behaviour. I don't talk much about those, because I'm often in and out within the hour and too busy doing it.
A: Answer by experienced trader MTG. I make most of my money from ongoing downbets. In many cases these are companies whose troubles are specific to themselves and for whom up kicks in the general market are largely irrelevant. I do have long-term and shorter/medium term longs which at times might balance or exceed my shorts. But my efforts to neutralise my exposure are pretty feeble, as I am forever adjusting my stakes which kinda throws the balance around.
"..I don't wait for stocks to start falling; prefer to get in at the top..."
If you are clever enough to be right about it being the top, and it falling from wherever that is, that's great. I don't have such precise and certain skills. I am much happier collecting some of the points in the middle of a run - upwards or downwards - than relying on my judgment that a run is definitely over before the evidence appears.
A: Answer by experienced trader MTG. Well, quite expectedly the biggest problem with shorting is a buyout or other sudden corporate restructurings crashing through your stop loss. My biggest loss to date was when a company I was short of announced an issue of free shares to existing holders. I was deemed to have aquired these additional shares at a price of zero, and was now shorting them from that level(!) but the shares of course instantly took on a market value quite close to the existing share price. That dilution had a favourable effect of course on my existing downbet, but that was hugely outweighed by the mark-up in the price of the free shares :-O That's why I prefer to short what I consider to be fundamentally overvalued stocks.
For these reasons I do ensure that my stake is within a range that allows for the occasional huge jump. I could pay for guaranteed stop losses - but I for most cases I judge the extra premiums to be not cost effective vs the risk, and they are often unavailable anyway on stocks considered risky or illiquid. Instead I take the occasional hit as being part of my trading overheads ;o)
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