Warrior Trading Blog

How To Short Sell Futures | Trader Steve’s Mini-Lesson


Hey, what’s up, fellow traders? Its Trader Steve, Futures Warrior, here. I thought on a day like today, and in recent weeks, we’ve had such tremendous volatility and sell off, a corrective bearish market here in recent weeks, that I thought it would be a prime opportunity to teach you about how do you make money as a day trader or investor in a market that’s going this way? Just like you see on this chart right here on my screen. Well, the good news is this. There’s something called short selling, which allows you to, when you expect markets to go lower, take on a position short by selling first. Or, in the case of stock traders, borrowing shares from your broker. In the case of futures traders like me, it’s exactly the same as buying low and selling high, except we sell first and then we buy back lower. Exactly the same way we manage risk. We just flip it around.

Take a look over my shoulder in today’s chart because there was a nice example of this. In fact, ironically, I took two short positions in the E-Mini S&P doing just that, leveraging the short side on expectation prices were going to be going lower, and I capitalized on the trade. Let’s go back first in time, to look at yesterday’s session. This is the E-Mini S&P. It happens to be a 10 minute chart at the time of this recording. But, whether it’s this market or another index, like the Russell, the Dow, the NASDAQ, or the S&P, it could even be just your expectation on an individual market as well. It’s not just index products. But, let’s focus on the index products as well, because I think there’s a a misconception that for day traders there’s no opportunity to be profitable in markets that are going down.

Well, all be it, it would be challenging if the only strategy you had was what we call a long only bullet strategy, where you had to buy low and find an opportunity to sell high. In a downward trending market, that could be very difficult. But savvy traders know about short selling, and that means you can first sell short. I’m going to highlight an example of this and walk you through the math. This is going to be a hypothetical example for you. Look over here. These are actually some technicals I use that would trigger a short position yesterday, early in the morning, at a price of 2930. There we go, 2930. Pardon my chicken scratches there. It’s a little trick writing with a mouse pad. We sell first, so I’m going to write sell, which is the same, when we sell first, as saying going short or initiating a short position. When you’re going short, you want prices to go down. That’s your expectation. Otherwise, of course, you wouldn’t do that. You still can put stop losses on a short order, which means we can pick a price up above. So, I’m going to put a little hash mark up here and we’re going to call this the stop. That’s a stop loss. It would be a buy stop order above.

So, we’ve sold here at 2930, where my fist is, but if the market should go up, let’s say it goes up here, we’re going to get out of that trade. Maybe we put the stop, I’m just going to pick an example, I don’t know, 2940. That’s 10 points. That, in this example, happens to be about a $500 risk, but it could be whatever you want. If you only want to risk $100, you would put it two points higher, at 2932. If the market goes up instead of going down like you expected, you’d be on the sideline for a small losing trade. But let’s be opportunistic and let’s be positive. The market does go down just as you expect it. Down, down, down, down. How do you lock in your hard earned profits for being right about the market direction? Well, it’s called trailing stop. You take that stop, which we started up here at 2940, and we trail it down. I’m just happen to do it for example purposes around these levels of some analytics that I use. That’s called a trailing stop. So, every time you move the stop, if the market at any time breaks back above and trades to that price, it’s going to take you out of the market and, of course, you would make the difference between your entry point up here and then where you would cover or buy it back.

Let’s take this example just a little bit further. We’re short from 2930, and I want to give you the math here. The market comes down, down, down, down, down. Look at how far this thing goes before the eventual market starts to kind of bottom out and go higher. Let’s say we’ve had enough and we want to cover our profits at 2850. This actually just happened over the last 24 hours. That would be a total of how many points lower? From there down to here, a total of 80 S&P E-Mini points. What’s the value of a point in the S&P E-Mini? Well, it’s $50, I’ll tell you that. $50. Which means, on that move, would be hypothetically $4,000. Now, I’ll confess to you that we don’t see this type of movement every single day. In fact, we don’t see this type of volatility and movement every single week or month, but it’s nice to know that there’s a way for you to protect yourself and actually be profitable in the futures markets when the market goes into breakdown mode.

How much does it cost to short sell in a futures account in a strategy just like this? Well, it’s a lot less expensive than you probably think. In E-Mini S&P, and most firms that offer day trade margins, will require that you have a minimum of about $500 in your account per contract. $500. Again, that’s a real, real life move on the chart that would’ve been very profitable for a short selling strategy. What about other alternatives? If you want to have less in the account, well there’s a new product that’s been out since May of this year, at the time of this recording, called Micro E-Mini Futures, which at many firms only requires you to have about $50 minimum day trade margin because it’s one-tenth the size of the E-Mini S&P. So, one-tenth the size, one-tenth the risk, and one-tenth the margin requirement in an account. I hope that gives you hope that regardless of market direction, there is markets, utilities, and strategies that allow you to not only just hold your own, but you can actually be an opportunity seeker and make money and be profitable in bearish market conditions. Until my next lesson, I look forward to meeting you back on the market soon. Trade well.

Hey, I see you there. If you enjoyed that video, give me a thumbs up and leave a comment down below. And be sure to subscribe for more great videos just like this from Warrior Trading.



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