Trading Strategy: Selling Rallies

This strategy is the opposite of buying dips, and applies in a bear market. It involves taking a short position, selling on temporary strength in an otherwise downtrending market. Here are the steps involved –

• establish that the market is going down
• check that the sector is going down
• the particular financial security is going down
• wait for a short-term rally in price
• wait for the short-term rally to end
• calculate trade size and stoploss
• enter trade short
• exit trade if failed or on profit

We would again look at the moving averages or by inspection determine that there was an established downtrend, both in the market as a whole, in the sector, and in the security. The signal that there is a short-term rally would be that the price was higher than previous few sessions, or that the RSI has been overbought for three sessions.

The rally can be considered finished when the price falls below the previous lows. The protective stop would be above the previous highs, and the exit would be on a trailing stop or if a moving average turns up, signaling the end of the downtrend.

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