When to short (and when not)

Shorting an instrument is not more complicated than going long, yet context is very important before entering a short position.

When the underlying market is on a strong bull cycle (like we are now in 09/2020) we need to look for a set up to short where the risk is on our side.

We look for a 1-2 set up to the downside, preferably a 1-2, I-II (for double confirmation).

Let’s have a look at the following daily chart: https://www.tradingview.com/x/7ncbJqI9/

After an initial post IPO correction (in an ABC structure), AQST bottomed on March 16th of 2020 and, since then, has developed a nice 5 waves up from that low. In the chart we can see the retracements levels for a next entry going long but let’s take a look at the 5’ chart to look for a short entry: https://www.tradingview.com/x/FQsUoFNe/

As we can see from the 5’ chart, we have developed a 5 waves down and it seems to be completing a 3 waves correction. We can also see the upper resistance levels we can use for short entries.

For instance, we can set 3 limit orders to short at 9.03, 9.23 and 9.3, with a stop at 9.47 and 4.57 as target (4.57 is the 0.382 retracement on the daily chart).

Let’s do the math:

So now comes the question when not to short? We should NEVER short in a bull market when there is no setup and when the risk is NOT on our side. In the trade above we have very little to lose for very much to gain, so even if the setup fails we can repeat the same process many times without losing too much capital.