Shorting and stop-losses

[keret]

Hello and thanks in advance:

When shorting stocks, what kind of stop losses would you implement?


Thanks/regards

[Novice Investing]

Very hard. Since sky is the limit. But, to reduce your risk somehow, you can employ some technical analysis stop loss or time loss.

[keret]

Thanks for your time.

Can you be more specific?

If I short sell a stock that trades at $10 how should I protect myself?

Sorry if the question seems stupid but...I need to make sure I understand this before I screw-up.

My margin account was opened and I am ready to go.


Thanks again...

[Fredledingue]

You can protect yourself by putting a buy order if the stock climbs above a certain price.
You will lose money, but not as much as if the stock doubles up.

HTH

[keret]

That makes total sense. I researched a bit and I saw (in many places) that they were recommending a stop-and-loss if the price falls below 10% and that didn't make any sense because when you're shorting YOU WANT the stock price to go down.

I guess I misunderstood it but this is what investopedia says about stop and loss (when shorting)

In other words, setting a stop-loss order for 10% below the price you paid for the stock would limit your loss to 10%.

[Stocktrading101]

Keret,

Here is a written out explanation of stop loss orders and how they work,

http://www.stocktradingtogo.com/2007...rs-the-basics/

When shorting or buying, you should cut your losses according to what your overall strategy is. I typically recommend cutting losses anywhere from 3 - 8% below your purchase point.

The mentality is such that, if you buy a stock and you lose 20% on it, the stock is going to have to go back up well more than 20% for you to recoop your losses.

Stock Start Price: $100
Stock Drops 20% (-80): $80

To return back to $100, the stock needs to advance $20, or 25%, not 20%.

If you want to dig a little deeper into this topic, I would recommend reading this article on profit vs loss ratios,

http://www.stocktradingtogo.com/2007...vs-loss-ratio/

Hope that helps .

[keret]

Thanks for taking the time to answer me. Am I wrong or these articles are for "long" positions? Here I am talking about short selling.

The logic should be reversed.

But again I am guessing...

[Fredledingue]

A stop-loss is indeed to protect a long position from further fall outs.
To protect a short position, just do the oposite:
Instead of buying if a stock falls, buy it if a stock climbs.