One of the greatest advantages of bring a trader rather than an investor is that you can make money in both directions. So unlike traditional investing a bear market, like the one we are experiencing at the moment, doesn’t limit your profit opportunities at all. However if you are looking to go short, there are some companies that are better candidates than others.
One thing you will notice is that most of the medium and large sized companies listed on the stock market rise and fall broadly in line with the overall market. So it’s reasonable to conclude that if the main index is looking overbought and therefore likely to fall, then you could go short on any of the major companies and expect to make some reasonable profits.
However you can really improve your chances of success by using technical analysis first of all because you will generally find that some companies go up far more than the overall market in percentage terms. So you could look at indicators such as RSI, CCI, stochastics and MACD to find those companies that are massively overbought and most likely to fall the most if the market turns.
If you are more of a longer-term trader then it’s the fundamentals that you really need to be looking at in order to find some excellent shorting opportunities. Nowadays you can go short on a huge number of different companies, even the small-cap ones, so if you do some research it’s not that difficult to find some pretty weak companies.
If you want the really big gains then you need to use a stock screener tool to identify those companies with huge levels of debt first of all. Then once you have a shortlist of companies you should analyse them further in order to find out how this debt compares to their overall yearly profits. If it is several times net profits then the company may well run into trouble in future years and may even go bankrupt.
It’s important to note that you shouldn’t just look at this year’s figures because previous years figures and analyst forecasts for future years will tell you everything you need to know about a companies financial health. If their profits are not expected to grow very much, or worse still actually fall, whilst the debt is likely to either remain the same or increase further, then you have found a very good shorting opportunity.
While it’s never nice to see any company run into financial difficulties, it does nevertheless create trading opportunities and now it’s just a case of timing your entry point. It’s not so important if you plan of holding this position for a very long time, but you should still try and entry a short position whenever the share price has temporarily gone up to overbought levels to increase your overall profits.
So to sum up, although there are several key indicators you may wish to look at, you should at the very least look at companies with large amounts of debt in relation to their overall profits, because this can throw up some excellent shorting opportunities.
Article Source: Articles Engine
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