The Hindu Business Line : Trader's Corner

Many among the trading fraternity are comfortable buying low and selling high. But when it comes to selling high and buying low, they hold back. Perhaps it is to do with the fact that human psychology likes to ignore or pretend that the darker side does not exist.

The first step towards becoming a successful trader is to accept the reality that markets cannot keep going up all the time. Bull and bear phases are integral parts of a trading cycle.

Trading in a bull phase and a bear phase require different approaches and strategies. Buying in dips is a winning strategy in the bull phase just as short selling is in the bear markets. Investors can afford to ride out the bear phases by staying invested in quality stocks or by paring their exposure to the stock markets. But traders cannot afford the luxury of doing likewise. They need to learn to ride the crests as well as to know what to do when the wave breaks and they are in the `soup'. Traders who do not change and adapt will find themselves giving company to the fish in the deep. That brings us back to the mental barriers some traders have to short selling. It needs to be understood that short selling is a perfectly legitimate activity. The definition of short selling as per investopedia.com is "The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller.

Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short." Some traders feel that short selling is unethical as they are aiding in the fall of the stock. That is another myth that needs to be done away with. It needs to be understood that short selling is done in the secondary market and has no effect on the capital of the company. Short sellers are required to lend depth to any market and to make the markets more efficient. Lack of short sellers will make any market too over valued and the correction that follows would also be that much deeper. Taking short positions in futures and options also helps in hedging the portfolio.

So it is time to let go of the notion that joining the short selling bandwagon is akin to joining the mafia whose sole intent is to pull down the markets. Just as you do not have any qualms about buying stocks, there need be no hesitation in short selling either. The choice is ultimately yours - you can either fight with both hands free or with one hand tied behind your back.

Lokeshwarri S.K.

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