The stock market can be a scary place sometimes and not just for beginners.
Even experienced traders can get that weak in the knees moment when you just buy stock XYZ and the next day the CEO is caught in bed with his secretary and the market opens at a limit down. When you are faced with such a scenario, I know it doesn’t help but take my word for it, you are not alone, you have a lot of company. There isn’t a single trader who has not gone through the weak knees, the gasping for breath moment when everything in front of your eyes goes a little fuzzy. Unfortunately, being a trader, it all comes with the terrain.
[row][column size=’col-md-6′ ] What I try to do in my weekly newsletters is chaperon you through some of those SEEs (significant emotional events) and, as I have found over the years, the best way to do that is with information. I get a lot of questions about trading but the single most asked query, one that transcends all genders and all age groups, the one issue with the most mystery and has the most confusion swirling all around it is short selling.[/column][column size=’col-md-6′ ] Short selling allows you to make money when a stock falls and, to most, this sounds instinctively wrong. There are some who think this even echoes as illegal (like most people I know). But short selling is 100% legal and can be very lucrative. With that said, I believe the best way to shed a light on short selling is with an example. [/column][/row]
Let’s say you bought a candy apple red 1965 Mustang convertible, with red/white interior and a white ragtop. Regrettably though, you could not pick it up right away so your brother offered to go get it for you, since brothers do this sort of things – don’t they?
Now much to your dismay your brother decided to sell your mint 1965 Mustang convertible on the way home for $16,000. You find out and needless to say, you are extremely distraught – as you should be. You may want to pound on your brother but, heh, he’s your brother.
You may want to pound on your brother but, heh, he’s your brother.
In order to resolve this thorny situation, your brother needs to replace this car he “borrowed” meaning he is SHORT one mint 1965 candy apple red Mustang.
So your brother has two options if he wants to stay your brother and not go to jail. He has to buy another 1965 Mustang to replace the one he just sold.
If he finds one and can purchase it for $14,000, he would have walked away with a smooth $2000 profit, however, if he could only find one at $18,000, he would end up losing $2000.
In the stock market it’s the exact same concept. You borrow shares of XYZ Company — just like the Mustang. At some point you have to return those shares, and if you can buy them back for less than you sold them for, you make a profit. If not, you take a loss.
The only difference is that the venue for both buying and selling the stocks would be the stock market, and you borrow shares from, or via, your brokerage, not your brother.
What is a Slot?
Here at QiT we use a technology called “Slots” (not to be confused with the 1-armed bandits in Las Vegas) to monitor the maximum number of positions each algorithm will allow in its portfolio.
Here’s how it works. Each position in a portfolio is allocated a slot. All trades that fit the rules are sorted by their respective HV(100) and the trades with the higher HV will be allocated a slot. This translates into trading the more volatile stocks because research has proven higher volatility stocks are more lucrative candidates for trading.
What happens when all Slots are filled?
Let’s say an algorithm permits 10 positions maximum, we will try to fill all those “slots.” Taking it a step further, let’s say 6 of those slots are already filled so it will try to open 4 more – this is very straightforward. But what about the slots that are filled today but have been signaled to exit tomorrow? If the exit is a market at open, the slot will become available right away but a limit exit becomes a little trickier. There could be more than 10 open positions for part of the day, or until the limit exit is reached. This is not a problem with a margin account but it is with a Cash account. The algorithm, being as smart as it is, will recognize a cash account and not allow more than the maximum number of slots to be filled.
Then we have the additional issue of which slot is available? Is it a slot with a larger position size or smaller?
Aren’t you glad you have an algorithm to do this all for you?
Plan your Trade and Trade your Plan