Looking for a low risk short trade? Entry is everything! Here’s your trade on Chevron ($CVX) (January 08, 2019)
CVX
Let’s talk about Chevron ( NYSE: CVX ) here; although it could be any stock, I am really just talking about this chart. A lot of people want to know about shorting. A tendency that traders have to short is, they see something like this, and you see this support line here in this general area. They see this support line and then the stock starts to come down to it. When the stock falls below this last low, that’s when they short. And low and behold, it worked this time; it worked.
But what they are not really thinking is, that the stock had been up here. By the time it’s down here, it’s down 12 percent, which is a lot for a stock like Chevron ( NYSE: CVX ), not for some Internet stock but for Chevron ( NYSE: CVX ) this is kind of a big move. You are shorting here on the breakdown and that makes for a high-risk trade; because if the stock snaps back are you going to cover? After all, it’s got to climb through all this resistance here.
So are you going to hang onto the stock or are you going to cover here? Then it’s moving up, well now maybe I better cover. Well, now maybe I better cover. This stock can keep going and it has to chew all the way through this resistance to here before you know whether you are wrong or not. Maybe you were just early, your timing was just crappy, the stock is going to come up here and then it will implode.
So this is not the time to be shorting but this is when a lot of traders do trend to short, right here. In this case, again, it worked out. I deliberately picked one that worked out. It worked out to a point. But then here’s the other issue with these things: The stock is moving down here and you think it’s awesome. I’m going to cover at 100.00. It doesn’t quite get there and the very next day this thing snap hooks up 7 percent. This is a “rip your face off” rally. Suddenly, you shorted right around 109.00, the stock is down here and now you are scrambling to cover your short. Maybe you made money, maybe you didn’t. But it didn’t do it right away you wind up losing money on it.
I am showing you a different way to be shorting stocks. You want to be looking at stocks that have broken down like this one did. Generally speaking, it is in a downtrend, you can see, just lower highs. And then the stock rallies back up to a key level here, in this case the 50-day moving average and then closes very close to the low of the day.
The point is, you can be shorting this stock now and it’s a low-risk short. You put your buy stop a little bit above the 50-day moving average; it will wind up being about a 2 percent risk on this. And what you are betting is this; the stock came down to a new low, rallied up. By the way, this stock traded on Tuesday it looks like this is the high. I am going to go ahead and short this stock and look for $5, $6, $7, $8.00, something like that.
But if the stock rallies above the 50 and closes at a new high, relative to the high today, then I’m wrong about this. Because if I had done that a few days ago that wouldn’t have worked real well, I’d had been wrong there. This is my trade; I am shorting the stock here, looking for a move to the downside. But if the stock goes against me I have lost just a little bit of money and that is a good risk/reward trade.
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