Going Short

The converse strategy to going long is known as going short, or selling positions only to buy them back at a later stage and (hopefully) a lower price. It takes a pessimistic view of the market for a particular asset, and banks on the asset value taking a tumble in order to profit from the opportunity. As a result, the notion of short selling (particularly in the sphere of company shares) has led some to question the morality of down-trading assets and effectively profiting out of the downfall of others. Fortunately, trading isn’t about morality, and as a strategy it can be particularly effective as part of your trading portfolio.

Spotting The Short Opportunities

The trick to selling short, as indeed with most aspects of futures trading lies in identifying the right picks at the right price – easier said than done! In order to identify shorting opportunities, the trader must seek to establish either an overpricing in the market, or a long-term negative future for the particular underlying asset. One of the main ways in which this can be done is by looking at the factors which drive asset prices in the first place – namely, supply as a ratio to demand for commodities, and a mixture of supply and demand and other factors for assets such as shares and securities.

Prices driven by supply are relatively easy to identify as shorting opportunities. Look to identify situations in which supply gluts are likely to occur, or where demand is likely to tail off over time. With commodities, the seasonal aspects of production could be a great way to pick up on opportunities of this sort. For example, if crop harvests take place at a certain point in the year, it may be the case that futures prices will tumble towards the harvest period. Try to spot externalities that could bear on the underlying asset and send its value, even temporarily, southwards.

Another means by which shorting opportunities can present themselves is through longer-term chart analysis. Look at how prices have behaved over the last month, three months, six months or even a year, depending on the asset at hand. Prices tend to stick within set limits, especially the wider ranging the perspective you adopt – look to identify signs of prices collapsing through previous boundaries, or approaching their previous lows on a downwards trajectory, coupled with other factors that might suppress their price.

Remember that futures contracts will always eventually, if not instantly, follow the movements in the market for the underlying asset – the two are intrinsically ties, so signs of an asset heading south are a good signifier that a shorting strategy might work wonders.

Short selling is an invaluable tool to have in your futures trading armoury. It presents the opportunity to really leverage the gains from negative price movements to good effect, and delivers the flexibility to switch positions as markets demand. As a dedicated strategy or part of your wider trading approach, going short on futures contracts can be a valuable technique to profit as markets descend, in addition to presenting an array of options for hedging, arbitraging and building a solid trading portfolio.

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