Long Side Trading #
When traders are “long” a stock, they are buying shares. This means they have a “long” position and expect the stock to go up. These traders will profit when the stock moves up, or will lose money when the stock moves down. They also have a “bullish” position. To exit a bullish or long side position, a trader may “scale out,” or sell their shares in small portions.
Scaling In or Scaling Out #
To enter or to exit a position a trader may “scale.” This technique, when used to scale in, means buying a partial position at 5.50, and adding (or scaling) with a 2nd position at 6.00. Due to scaling in with equal sizes, the trader has a cost average of 5.75.
Price Average #
Price average is the average price of the stock that you paid. Meaning if the stock was first bought at 10.00, then rises to 11 and you double your position, you will have a cost average of 10.50.
Dollar Cost Averaging #
Dollar Cost Averaging is a strategy many investors use, although it’s not used as much by day traders. This means that if every month you add $1,000 of stock even though you were adding at various prices throughout the year, you will have a dollar cost average that helps balance out the big ups and big downs that may have been occurring when you were taking positions.
Averaging Down or Averaging Up #
This is essentially the same process as scaling, except that averaging down isn’t something many trader do. It’s generally not considered a smart trading style. Averaging down is when you buy a stock at 10, the price drops to 8.00, so you add more shares and bring your average cost down to 9.00. If you add 2x or even 3x the size to 8.00, you could bring your cost average down as low as 8.50. The risk is that you are adding to a position that you are already losing money on, and some traders say this is throwing good money at bad money.
Short Side Trading #
Traders who are “short” on a stock are short selling shares and creating a negative share balance. This means they will be holding -1,000 shares. As soon as they sell the shares they turn a profit from the sale, BUT, they must buy back the shares. The shares have been borrowed from the broker to sell in advance, with the intention of buying the shares back in a short period of time.
You must borrow shares from your broker in order to short. If your broker doesn’t have shares available to borrow, you can’t short the stock. IPO’s are never shortable since brokers won’t have shares available yet to borrow.
To close a short position a trader must “cover” their position. This is buying stocks to cover the shares they borrowed from their broker. Like a long-sided trader, they can scale out of the short position in small increments.
Days to Cover #
Brokers will give traders who borrow shares a certain number of days to cover. This could be 7 days, 14 days, etc. By the end of this period if the trader has not covered their position, the broker can do it manually and will charge the trader a liquidation fee.
Short Interest #
Short interest refers to the number of shares all traders around the world are currently holding as a short position against the stock. If a company has outstanding shares (float) of 10 mil shares, and 1 mil of those shares are short, the short interest is 10%. When stocks have short interest 30% or higher, there is potential for short squeezes.
Short Squeeze #
This is when a stock suddenly starts moving up, and traders who are holding short positions start buying to cover their position, or their broker covers their position for them because they’ve hit a max loss on their account. This creates an extreme buy/sell imbalance and can lead stocks to making 50-100% moves intraday.
Short Sale Restriction #
Short Sale Restriction (SSR) occurs when a stock drops 10% or more in a single day. Once a stock has SSR traders cannot take short positions except when the stock is moving up. Positions can only be taken on “upticks”. In other words, when stocks are moving up. That means traders short at the Ask Price, and have to wait for a buyer to buy the shares they are trying to sell short.