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Trading Lessons

I Stopped Shorting Stocks

Updated 5/17/2022 5 min read

Hey trader. Tim here.

With the market in an apparent downtrend, you might think I’d be spending most of my time looking for opportunities to short…

But the truth is … I very rarely make bearish trades.

I know that surprises a lot of folks.

Some of my top students trade almost exclusively to the short side, like Kyle Williams…

Not bad to finish out the week up more than $68,000

You might be thinking…

‘Tim, don’t you primarily trade penny stocks? And aren’t most penny stocks just junky companies with no actual product, service, or revenue?’

It’s true … And it’s one of the main reasons I LOVED shorting penny stocks for a large portion of my career.

However, market dynamics have changed. And even in a bear market, the strategy only makes sense for a few people.

If you’re trading a small account and trying to build your stack … then I have an even better strategy than shorting stocks in this market…

And if you can identify these two things they can be total game-changers for you…

Learn About Floats

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Anytime a stock goes public, the company sets a specific number of shares that can trade on the exchange.

This is known as the float.

Floats can change if a company sells (tenders) more shares or buys them back.

By themselves, floats don’t matter much. They only matter relative to the volume that trades.

As you might imagine, low-float stocks often trade relatively few shares.

So, what do you think happens when news drives a bunch of traders to a low-float stock?

You get a squeeze.

It doesn’t matter whether someone has sold shares short or not. When you get heavy volume on a low-float stock, it usually sends prices higher.

Think about it like this.

If I owned a few shares of Stock XYZ that suddenly jumped 125%, I might sell one or two. But I’d likely hold out to see if I can sell the rest at a higher price.

If enough traders do the same thing, you’ll see the share price skyrocket.

Does it matter how many shares are sold short?

Of course.

When short-sellers — those who bet against a stock by borrowing from their broker — get caught in a squeeze, brokers will issue margin calls. That forces the short-seller to buy back the stock to close their position, which adds more fuel to the buy-side.

But here’s the thing…

The reports on short floats don’t get updated all that often.

And with stocks moving as much as triple-digit % intraday, they’re practically worthless.

That’s why I’m more interested in the total available float of a stock.

What would I consider a low-float stock? One with less than 10 million shares available for trading.

You can use filters on screeners like the one on our StocksToTrade platform.

Here, I can filter for a stock’s float, price, volume, and a host of other factors that save me time.

Watch Out for Breakouts

Take a look at the following chart of Sysorex Inc. (OTCPK: SYSX).

I circled various highs in the chart over the last several days.

Imagine you shorted this stock. Where would you have put your stop?

The recent highs would be a good place to start.

Every time a recent high is broken, there’s a solid chance you’ll see short traders covering their positions.

You see the same thing when long traders get stopped out.

So, how do we know when it’s likely to cause a short squeeze?

That’s when I look for the highest of the highs.

The longer a high has held, the more likely it is to act as a catalyst for a short squeeze.

Using SYSX, let’s zoom out to the daily chart.

See how the price made a high after a ton of trading volume hit the stock?

I can almost sense that short traders have their stops set at the highs.

Given that it’s been more than a week since SYSX made those highs, if it breaks them, it’s very likely to cause a short squeeze.

Now, that may not happen all at once if it just pokes above that price for a minute or two.

But when I see multiple candles close above that price, it indicates that buyers are stepping in and forcing shorts out of their positions.

Study This Chart

There’s no better setup to see how this concept works than my Supernova pattern.

I love this chart because it has all the lifecycle events for a stock.

And it’s also the pattern I used to help me make my first million.

Click here to learn more about my Supernova Pattern.



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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”