This is another in our series of trading biases and in this one we're going to
look at a real problem for lots of traders that can handicap them when it
comes to their approach to markets. Hello I'm David Jones from Capital.com. This
is the latest video in a series we're doing where we look at some really
common trading biases. Our trading platform has an algorithm that tries to
detect if a trader has a certain bias or has maybe picked up bad habits along the
way and suggest information to maybe help them refine their trading approach.
In this video we're going to look at the problems of traders who only ever trade
in one direction. Now, to more experienced traders, you might be
surprised by this but more than a half of people never sell short. So they
really do handicap their approach when it comes to falling markets. So first of
all let's explore this problem in a bit more depth, explain in theory how we can
do it - how to trade markets in both directions - and then we'll go through a
real example short selling the Dow. Now this trading bias is much more common
than you might think. There are lots of traders out there who only ever trade in
one direction. So what they're not doing is short selling. Let's just take a step
back. Markets move up and down - if you've ever looked at a market whatever it is
you know that markets do not move in one direction forever. But many traders only
look for opportunities to buy, this is also known as going long in market
terminology. So regardless of what the markets' doing - whether it's going up, down
or sideways - there are plenty of traders out there who will only look to buy. This
can be a costly approach in falling markets. If you have a market that's been
falling for weeks, for days, for hours, the last few minutes, then
obviously you know probably the sensible way of trading is looking to trade with
the trend and that trend is down. It can be costly trying to pick the bottom in a
falling market. So when trading CFDs it's really important to understand you can
trade markets in both directions. So if you think a market is going to fall
further you can profit from a falling market by short selling. I'm going to go
through the theory of this in a minute and then we're actually gonna look at a
real example. So what is short selling? Well when going short to open up your
trade you sell first and then you're looking to buy back later - to close the
position. And this is the thing I think that maybe confuses a lot of people in
the beginning, which is why they don't do it. This idea that you can open a trade
by selling first of all - you don't always have to buy - if you think your markets
going to go down when trading using CFDs you can short sell. So by selling first,
let's say we sell at 500, if the market does fall, let's say it falls to 400, then
if we're buying back lower we're going to profit. Of course if our view is wrong,
and the market goes to 550, and we close the position at a higher price, then
we'll lose money. But short selling is exactly the same as buying expecting a
market to go up - but in reverse. So we open up the position by selling first of
all, hoping the market is going to fall and we can buy back to close the position, at
a lower price. So let's say, for example, you thought the Dow was going to fall from
25,000 to as low as 24,000. You'd open a trade by selling first at 25,000,
and if you're right, and the market drops to 24,000, then you're going to profit by
closing the trade, by buying back. But, of course, you can close the trade whenever
you want to - whenever the market is open. So in that position you'll short the Dow
and you'll profit if the market falls. As usual you can place stop losses above
your entry point to manage the risk. So from a risk management point of view you
can do the same things [that] you could do when you're going long. So if you sold at
25,000 expecting the market to drop - you could pay to place a
stop loss at, for example, 25,250 and if
the market rallies to that point then your trade will be closed out for your
manageable loss. But let's look at a real example. So we're on the trading platform,
we're looking at the market, and the Dow has actually slid quite heavily
in the last few days. It's gone from 25,560 [and is] currently trading just above
25,000 down here. Let's say we thought "well actually this market is going to fall
further" - we want to sell short. Let's bring up our dealing ticket. So I think
the market is going to drop. I'll click up to choose the quantity I want - I'll just
do 0.1 - my margin requirement is there, I'm going to sell, so I'm opening
the trade by selling first. So now I'm short the Dow. Let's take a look at my
positions. So there you can see the trade. So I'm short - I went short at 25,024 -
the market has dropped really sharply. It's dropped very quickly to 25,000,
nearly 25,000, I've just done a small trade and there's my profit, my running
profit so far. So I've put a trade on the trying profit if the Dow Falls. The Dow
has slid quite a few points since I opened the position - so there's
my profit or loss in real time. If I change my mind, I can just close the
trade. I close the trade now and I can book a small profit for a slide in the
Dow that I made by selling short. So it's important to understand you can trade
markets in both directions. Don't be one of those traders who limits
themselves by just trading it in one direction. So hopefully you can see how
straightforward it is. It's like buying and selling but you sell first and buy
back later - and you're hoping to buy back later lower. You can see in the Dow
example that went well because the market dropped about 20 points, but the
principle is we want to open ourselves up to all sorts of opportunities in the
market. So the ability to sell short and actually looking for short selling
opportunities is an important part, I think, of any traders armory when it
comes to trading financial markets. We'll wrap things up there. There's a whole
host of other videos in this series so make sure you watch those. We also, during
the week, upload content where we look at various individual markets, different
trading approaches, that sort of thing so if you're subscribed to the channel and you
click the alarm bell you'll always get notified
when one of these gets uploaded. But for this session, looking at short
selling, from me David Jones and Capital.com we'll wrap it up there.