How To Trade Falling Market

20/03/2018 Rakesh

Most of the new people coming to the stock market investment and trading, just know only one way of making money that is by buying stock on low price and latter selling it on higher price. This is perfectly good in bull market means when the market is rising day by day. But what happens when the market starts going down. Most of the people trading in the market may sell all their stocks and wait for the market to bottom out. And this may take months to years. So, for this much time these traders have nothing to do because they don’t know how to trade the falling market. Because in most of the stock exchange you cannot directly short sell stocks including NSE and BSE.

Short Sell In Intraday:

In intraday you can short sell stock but you will be forced to buy those stocks before the market close. Else your broker will cover all your open short position for you. You will also lose the down moves happening overnight. Means many times market opens gap down considerably. You will miss this opportunity of making huge money in intraday trading. So any way you have to take position for longer periods to trade the falling market.

Traders who are trading seriously for making money in the stock market trade the market from both side.

How To Short Sell For Longer Term:

There are no direct way of short selling stock but there are many indirect methods by which you can short sell stocks and general market indices.

Stock Landing And Borrowing:

Some investor who have delivery of stock and have invested for longer period. So, they don’t bother the medium-term change in market cycle so they lend the stocks to the borrowers for small premium and continue to have the benefit of dividend, bonus, split etc. which are connected to having the delivery of stocks. So, these investors lend their stocks to the borrowers and then the borrowers can short these lot in bear market and after a considerable drop in price they buy back their short position and return the stocks to the lenders. In the NSE India this scheme is called SLB. But due to low trading volume and complication of process this method is still not so popular amongst retail traders and institutions.

Trading In Future Contracts Of Stocks And Indices:

The second method is very simple and many of the traders are aware of that. This is by trading of future contracts of stocks and index on the exchange. You can short future contracts even if you have not bought it earlier. So, you can take short position for 1 month to 3 months and rollover your position for longer period if you like. The future contract comes in lot so you can only trade in lots so this will require some margin requirements depending upon the volatility of stock or index. This is very popular method for taking short position on market.

Trading In Option Market To Take Short Position:

By way of trading in options of stock and indices this is also popular method of trading in all kind of market whether it is bull or bear. We will not go in the very basics of option trading but we will see how we can take a short position in stock with option.

If you buy an ATM PUT option and short an ATM CALL option you will have an absolute short position on that stock or index.

Example Of Short Sell Method By Options:

Example is given in the following video: How To Trade Falling Market

The Shorts Are Not Exactly The Opposite Of Long Trades:

Theoretically the risk involved in short position is larger than the risk in long trade. Because if you have taken a short position and if the underlying price rise you will lose money as long as the price rise, and the price can rise many folds and you can lose more than you have invested. While if you have bought and if the price goes down you lose money. And in the worst case the price cannot go beyond zero. So, the maximum risk is limited to your total investments. But all this is in theory. In practise we are not allowed to keep the short open beyond our account limit.