How to Make Money When Markets Drop

Today I thought I’d share something a little different. A glimpse into the world of ‘shorting’, which simply means positioning to profit when the market drops.

Most investors and traders usually make money only when markets go up but sometimes it can be just as easy to take advantage of a short term pull back when you feel the market has run too hard too fast.

We have witnessed this in the past month.

SPY Trade Completion - 11.3.15

I’ve written in the past that it’s rare and lucky to be able to pick the exact top or bottom.

This is one occasion where I picked the exact temporary bottom to exit (blue shade). Although I would like to tell you it was my incredible skill, I have to admit it was nothing but pure LUCK! I was actually expecting for it to probably drop a little more but as I work on probabilities, the probability of a reversal back up was higher since the market fell quite hard very fast already so it was only prudent to lock in the profits.

And no, I didn’t pick the top. In fact I actually wasn’t sure where or when the exact top would be. All I knew was that it was soon. So I kept selling ‘short’ over an entire period of 10 days, taking little 1% nibbles every day for 10 days (green shade) just patiently waiting for the big decline which eventually came after 2 weeks.

This shows how trading is a patience game and you must be willing to not only wait, but be wrong for a period of time until profits come your way.

This position was used not only to profit but hedge out my long term portfolio investments which inherently drops with the market. Shorting the index also cushions the blow in the short term and helps avoid the silly need to sell any long term investments due to short term market gyrations.

Total total average profit on this short was 2.88% over a period of 3 weeks.

Really hope the above sheds some light in regards how shorting can also work for you in a bull market.

 

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