We already learned about step one: picking profitable stock patterns. We’ve also covered step two: minimizing your risk. Now we’ve come to the final step that makes the system so unique: how to profit from stocks, even when the stock goes down.
It’s a common misconception that traders can only make money when the price of a stock rises.
Investors can make money anytime they can predict a stock’s future movement – up or down.
It’s time to learn about short selling.
Short selling is the secret to making cash in a down market. Here’s how it works:- Identify a stock pattern that suggests a stock is headed down.
Example: The Cleveland Cliffs descending triangle pattern in April of 2005 was perfect for short selling. - Borrow shares of the soon-to-decline stock from your brokerage.
Example: Let’s say, right before the Cleveland Cliffs pattern (above) breaks out and moves downwards, you borrow 100 shares of the stock. - Immediately sell these borrowed shares.
Example: You immediately sell these borrowed shares of Cleveland Cliffs at the price just below the support line: $70 per share, 100 shares = $7,000. You are now sitting on $7,000. But, of course, you still owe the brokerage 100 shares, which you don’t currently have anymore. - Wait for the stock to drop to your target price.
Example: You wait for the stock to reach the target price, which in this example, is $63 per share. - Buy the shares at the target price.
Example: You use the $7,000 you made earlier to purchase 100 shares at $63 per share. That costs you $6,300 dollars and leaves you with an extra $700 in your account. - You return the shares to your brokerage.
Example: Return the 100 shares of Cleveland Cliffs to your brokerage. - Enjoy your profits.
Example: You earned $700, a 10% profit on $7,000. And even better, you made $700 when the price of CLF declined and all other investors were losing money!
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