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Short Selling- Tim's Trading Challenge

How the Short Seller Mindset Helps Roland Wolf’s Long Trades

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Written by Timothy Sykes
Updated 11/21/2022 6 min read

Many traders struggle to know where to enter and exit trades.

Most can easily identify basic support and resistance levels.

But they never know IF those levels will work.

It always feels like there is some piece missing from the equation.

This problem vexed Roland Wolf for a long time.

As a long-biased trader, he likes to dip buy.

However, he wanted something beyond Level 2 data to help him identify key support levels.

That’s when he watched a video from fellow millionaire trader Tim Grittani.

Ironically, the video talked about short sellers.

And that’s when the lightbulb turned on.

As he spoke to traders at our conference this year, he explained how his mindset changed.

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You see, none of us are individually big traders, even ones with millions of dollars.

Instead, we need to think about things in the aggregate, asking questions like:

  • Are there shorts?
  • Where would they get squeezed?
  • Where would short sellers take profit?

Roland answered these questions, explaining that he works in harmony with short-sellers.

That change in his mindset helped him become a profitable long-biased trader.

Unfortunately, this is an afterthought for most traders who focus on their trades instead.

The good news is that these three simple questions can help any trader identify important price levels.

I want to show you how to apply these to recent charts to see how this works in a practical setting.

Are There Shorts?

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A stock’s price often determines whether traders will short the ticker.

You see, margin rules are different for stocks priced below $5.00.

If you’re not familiar with the concept, short sellers borrow stocks from their broker and sell them in the open market.

They try to buy them back at a lower price, sell it back to the broker, and profit off the difference.

Since a stock could go to infinity in theory, brokers require short sellers to have a margin account.

This allows traders to borrow funds and use leverage on their trades.

Normally, traders can use up to 4x the capital in their account.

However, when a stock is $5.00 or below, a trader must put up a minimum of $2.50 per share in capital.

If a stock costs $5.00, you have to put up $2.50, which gives you 2x leverage.

At $2.50, your leverage is 1x.

If a stock is below $2.50, you still need to put up $2.50.

Say you want to short 1,000 shares of a stock that costs $0.10 per share.

You would need $2,500 in capital to short the stock.

Consequently, traders won’t short stocks below $1.00.

Look at a chart of Nine Energy Services Inc. (NYSE: NINE), a recent runner that went from $2.50 to $11.00.

We need to answer the question: Are there short sellers?

Almost certainly, yes.

This stock jumped almost 500% in a matter of weeks.

Short sellers love to try and pick off the top.

And once it got over $5.00, the special short seller margin rules stopped applying.

Now that the stock has made a strong top, it’s moving into the Cliff Dive portion of my 7-Step Penny Stock Framework.

But there’s one important point to mention.

Short sellers need volume.

Without enough volume, as in millions of shares, they won’t be able to enter a position.

Where Would They Get Squeezed?

roland wolf in italy on boat
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This is a pretty easy question to answer.

All you have to do is think about this question…

If I were a short seller, where would I put my stop?

Don’t think too hard on this one because it should be pretty obvious.

When a stock goes Supernova, short sellers like to use important highs as their stop loss.

With NINE, you don’t get a cleaner high than $11.00.

Now, if the stock were still in an uptrend, you might use the high of the day as the squeeze spot.

Where Would Short Sellers Take Profit?

This is a much harder question to answer, which is why I talk about it often in my Millionaire Challenge coursework.

But let’s look at NINE and see if we can’t figure it out.

Keep in mind, we doing this so we can find a good support level to buy the stock for a bounce.

The high was $11.00.

The stock started its run just below $2.50.

Half way would be $6.75.

That would make logical sense as a potential spot.

But let’s say I wanted to be even more conservative.

The high of the trading range right before the latest run was around $4.28.

If I was a short-seller holding a trailer, that would probably be the final spot where I’d take profit.

So, if the stock came down to that level, there’s a very good chance it would bounce from there so long as it comes in quickly.

If a stock edged lower over time and just faded into that level, most short sellers wouldn’t have the patience to stay with the trade.

I know this might seem impossible at first.

But trust me, with practice, patience, and the right educational material, you’ll start to understand short sellers better and be able to pick out price levels with more accuracy.

—Tim


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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

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* 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”