What’s up, everyone? All right. Well, I wanted to make a little video for you guys, but I have a headache, so I’m going to do it mostly lying down. So bear with me. The topic is long versus short. And this is one that it’s a really interesting topic.
There’s a lot of room for debate and discussion around it. And as you guys probably know, if you don’t already, I am predominantly a long-biased trader. I trade the market to the long side, which means I buy stocks with the goal of selling them at a higher price. A short seller of, course, would sell and take a negative position, and then we will a benefit when the stock goes down, covering that position at a lower price. So just the way you buy and sell going up, you can sell, have a negative position, and then buy as the stock goes down.
So why am I a long-biased trader? Well, I suppose I could probably trace the roots of being a long-biased trader back to the summer of 2001 when I first started trading in the market. And that was my summer where I decided, for whatever reason, that I was going to start to invest my money, my savings, which was about a thousand dollars.
And I was buying stocks like ExxonMobil, U.S. Steel, American Electric Power, Cannondale, I think American Ski Company, and Pfizer, Caterpillar. And I was sort of taking a couple shares of all of them. I was fancying myself as a aspiring investor and that I was going to figure this out. Well, by the end of the summer, I hadn’t made any money. I’d burned commissions. I don’t know, I liquidated the account and probably bought something stupid. I don’t remember what I did.
But I didn’t even know at the time that you could go short. So I think like a lot of us, my brain was just trained that if you want to get in the stock market, you’re buying stocks. You’re not shorting. So then when I got back into trading a little bit later in my 20s, I was looking at penny stocks, and I was looking at buying penny stocks. I didn’t, again, know you could short it. And then as I started getting more into the market, I realized that there was this opportunity to short, but I think I was already so mentally wired to look for things that would go up that I just focused on that.
As a beginner trader, sometimes people will say, “Well, why don’t you just do both? Why don’t you buy these stocks as they’re going up, and then when they get to the top, short it as it comes back down?
Then you’d make twice as much money or you’d certainly make more.” And the problem is it feels kind of like, at least for a beginner trader, it’s like teaching you how to play tennis both lefty and righty. When the ball is coming and you’re swinging back to take that stroke, you can’t just switch from lefty to righty. The way you look at it, you have the way you position, and you approach it from that mindset.
So with trading, a lot of times when I buy a stock for a breakout, I’ll take a starter, maybe on a pullback, moving average, VWAP or first candle to make a new high. I’ll add as the stock breaks through the highs, as it squeezes through high of day, and then as it pops up, I sell half, I sell half, I sell half. Where I’m selling half and taking profit, I’m looking at resistance levels on the daily charts. That’s a place where a short seller might be taking a starter position, and as it squeezes higher, they might add to the position.
Oftentimes, it seems that short sellers will add as stocks are going up. And then as they roll over, they go in full size, because it’s kind like trying to buy a bottom bounce. Once you have the confirmation on a bottom balance, the stock is already way up off the low. So you don’t have a very good entry. So same with trying to short something that’s spiking up.
A lot of people will short as it’s spiking, and then add once they get a little confirmation, but then they have a better cost basis. The problem with that of course, is that you’re shorting into a squeeze and sometimes you get squeezed out on what’s called a short squeeze.
And as a long-biased trader, it’s hard for me to flip from long to short, because usually by the time I’m like, “Okay, this looks like a short,” the good entry’s already gone. I missed the opportunity to take a good entry and I’d be chasing it. Because the entry sometimes is when I’m still holding it long as it’s hitting the very high.
I might think it’s still an opportunity to long side. I might even be adding for the next leg up, but that’s the spot where an aggressive short seller might be taking a starter. So there are certainly some people I’m sure who would hedge where they’re long in one account and shorten another, but that’s advanced trading. That is not stuff that a beginner trader would do.
And so for me to do it, I try… And this is something that I struggle with, just sort of as a side note. On the one hand, I want to what’s best for my account. I want to grow my account as much as possible. I have my $583 to $1 million challenge, which I’m still trading in that account.
The next goal is 1.5 million and then 2 million, so on and so forth. So I have my personal goals of trying to make as much as I can. And so sometimes those goals would encourage me to do something riskier, like maybe going law and short, flipping back and forth, or maybe trading in multiple accounts. The problem is that is not really in line with being a good teacher for a beginner trader, because a beginner trader is not usually going to be able to have multiple accounts.
A beginner trader is not going to be at a place where they can be flipping long and short or jumping between small caps and large caps and ETFs and VIX and SPY and everything else. For a beginner trader, it’s a lot easier just to focus on mastering one strategy. And that’s kind of the thing with trading is sometimes people will try to trade five or six different strategies.
They might try to learn my strategy and Mike’s strategy and also try to trade options, and maybe dabble in futures. But being so-so at 10 different things, that’s great. That’s the Vermont kind of mindset of living on a farm. You know a little bit about everything, enough to rewire something that is an electrical thing or enough to fix the plumbing, enough to weld something back together. You’re not an expert on any of it, but you’re a Jack of all trades, a master of none.
That doesn’t really work with trading, because if you’re not consistent at one, if you’re not good at one, you don’t make money.
You’re not consistently profitable. And no one is going to keep trading for months and years on end if you’re not consistently profitable. So you have to find that one that resonates with you. And for me, it’s trading to the long side. And I also think that it’s easier for most beginners to grasp. It’s logical. It does not require a margin account. In order to short stocks, you have to have a margin account.
Not everyone can get approved for a margin account. Brokers have different compliance restrictions on who they’ll approve. And then the obvious challenges that come with short selling. So just kind of lay them out. If you want to buy a stock to the long side, you can open up an account with Robinhood. You can open an up account with TD Ameritrade. You can open up an account with one of the brokers that I use for small account challenges, and you can buy a and you’re in it.
There’s no restriction on buying. You don’t need a margin account. You can buy stocks. If you want to buy them, you can buy them. However, there’s a lot of restrictions around short selling. Well, why is that? I mean, from a regulator standpoint and sort of the market at large, the economy doesn’t benefit from stocks tanking.
And so there’s mechanisms in place to prevent stocks from dropping really, really fast. And so these are some of the short sale restrictions. So the first one is actually called the short sale restriction. And what it says is that if a stock has triggered the short sale restriction threshold, and there’ll be some links down the description with more info for you guys who want to learn more about it, terminology and stuff like that, if a stock has triggered the short sale restriction, then you can only short it on an uptick.
So you can’t mark it into the position as it’s dropping. And the problem there is that most traders who focus on breakouts and breakdowns want to be able to just jump in when they like it. It would be like I only being able to buy a stock when dropping. Most of the time I buy stocks as they’re moving up.
The short sale restriction means you can’t short when it’s going down, you have to short on an uptick. That’s the first restriction. The second restriction is that… Well, and this is more of the limitation, is that you have to be able to borrow the shares to short. And so that means your broker has to have inventory available so you can go and take that negative position.
You sell it, you have a negative position, and then you buy it back at a lower price, hopefully. But brokers, they’re more conservative about letting you short low price stocks because low price stocks sometimes go up 100, 200, 300%.
And what happens if you’re short? All of a sudden your account is in the negative. If you buy a stock at $10 and it goes to zero, you lost all your money, right? You’re down to zero, but if you short a stock at $10 and it goes up to a hundred bucks, all of a sudden it’s gone 10 times against you, and your account is in the negative, right? It can go exponentially against you. And that’s the one of the big risks of short selling. And so brokers want to manage that risk so they’re not on the hook, essentially, with a client who’s blown up their account, is in debt to them, and they may or may not ever recover that money.
So number one, short sale restriction. You can only short when stocks have it on. You can only short on an uptick. Number two, availability of shares to borrow. Number three, you have to pay with a lot of brokers to short these kind of hard to borrow stocks. So they charge you an addition commission on top of the regular commission.
It’s the commission to reserve the shares to trade them. And so you have to reserve those shares before you take the trade, which means you’ve already committed sometimes a hundred or $200 in the cost to reserve, even if you don’t take the trade. So you’re basically starting in the red. Now 200 a day, let’s think about that. That’s $50,000 a year. So do you want to be spending $50,000 a year to reserve these stocks? Of course, if you make 200 or 300 grand, it’s worth it, but every day when you reserve, you’re starting in the hole.
So short sale restriction, difficulty finding shares available to borrow, then the cost of borrowing shares, all of this makes it more difficult to be a short seller. It’s kind of like, I don’t know, wanting to learn golf and you’re a lefty. Well, you’re going to have to find someone that’s got clubs that you can borrow as a lefty. More people are righty. It’s harder to find lefty.
I’m kind of funny because I golf. I don’t golf. But when I have gone golfing, I golf lefty. I swing a bat lefty, but I can also swing a bat righty. I’m more accurate lefty, but I can swing a little harder righty, so I go back and forth. But then I kick with my right foot, and I throw things, like my headphones when I have a bad day of trading, with my right hand.
So I can speak from experience about the challenge of trying to learn some things as a lefty when everyone does it righty, and then other things as a righty is just so much easier. Trading to the long side is easier for beginners. Some beginners will find that they have a natural aptitude to the short side.
And so once they’ve overcome the initial learning curve, that you understand short sale restriction, you understand how to borrow shares, you understand that some brokers won’t have shares to borrow ever, so you have to open special brokerage accounts. Once you get over that stuff and you learn it, then you can trade to the short side if it’s the way you see the market, and you can do really well.
I’m not saying you can’t be profitable as a short seller, but it seems to me, from my own experience, that it’s easier to approach the market from the long side. And then if you really feel that you just naturally see things better to the short side, then at that point making the transition.
If you were going to start from the short side, it feels like you’re starting already with the cards stacked against you a little bit. You’ll have to open, usually, sort of one of these boutique brokerage accounts, because Lightspeed, E-Trade, Ameritrade, Robinhood, they’re not going to have shares available to borrow of most of the stocks you’d want trade. Those brokerages cost a little bit more money each month.
They charge you to reserve the shares, and then you still have to deal this short sale restriction. So yeah, I don’t know. That’s my thought. I want to go with kind of what’s easiest, both for me as a trader, but also for beginner students, because my job as a teacher is to try to help beginners have every advantage as possible to be successful. So I don’t want to set you guys up for failure.
So I don’t know. That’s my thought. What do you guys think? Leave some comments down below. Check out some of the links in the description to learn more about the short sale restriction and a few other things that we talked about here, and I’ll be looking forward to seeing your comments. All right, hopefully this headache goes away and I’ll be able to put together a couple more nice videos for you guys. All right, see you guys later. Bye everyone.
Hey, have you seen my most popular video on YouTube? It’s got over 5 million views. You can check it out right here, and check out one of my other videos on YouTube right here. I hope you guys enjoy, and as always, if you have questions, leave them down below in a comment section. I personally respond to every comment that’s posted.
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