[Reading notes] : chapter 13 how & when to sell short

BITSTAMP:BTCUSD   Bitcoin / U.S. Dollar
Hello, everyone

This is a threads of my reading notes for the great book: [Technical analysis using multiple timeframes]

And here is the notes of chapter 13, how & when to sell short

I will go through all of key points of this book, and find proof from the bitcoin chart.

Why to selling short?
from the book : bear markets occur every 39 months on average and typically last for about 18 months. that is a lot of time where the odds are stacked against long trades and where selling short makes sense to generate market profits for the purpose of current income.

And let's have a look at the bitcoin market for the bear market times:
02.Dec 2013 ~ 24.Aug 2015 last 21 months.
18.Dec 2017 ~ 28.Jan 2019 last 14 months.

In the long time of bear market, shorting is a good tools to catch great profit.

Measures of sell short
By selling short, the trader expects to profit by repurchasing the shares at a lower level and profiting from the difference.
And cutting losses must be taken very seriously when selling short since the unlimited losses.

Shorting takes the right mindset
Selling short is a skill that every serious trader learns to utilize during stage 4 market declines.
The best time for sell short is during a bear market, but there are always stocks in a stage 4 decline that can be sold short regardless of the overall market environment.

What is a bear market?
The most obvious sign of market bearishness is when the majority of stocks are in established downtrends or when the overall market indices are below key moving averages. the best way to define a bear market is an environment in which markets where the 200-day MA is declining.
Let's look at the chart pattern of bitcoin in bear market 2014 and 2018 with 200 day MA.

From the chart above, we can see in the bull run, bitcoin will not touch the 200 day MA, if bitcoin drop below the 200day MA, then it's high possibility we enter the bear market, and 200 day MA will become a major resistance line of bitcoin .

But is it the best indicator of bear market? how can we measure we are near the peak of ATH? find the bear market indication in in early stage is very profitable and very risky also

another clue is the price of stock/bitcoin drop below the long term support line. such as in 2017 bull run, the 20 week MA is the most important support line for bitcoin , but it drops below the 20 week MA on 29.Jan 2018. This may indicate the bear market is coming!

And I found another indication is the bitcoin is not correction in healthy range (20 week MA) and resume to advance again, this means the final ATH will be very soon.

Sentiment of bear market
In the bull market, everyone is very confident, but in bear market, stock tend to drop much quicker than they advance and it has a great deal to do with emotion. bear market are characterized by a stronger emotion response than bull markets because people are complacent when they are winning and become frightened when they are losing. fear is a much stronger motivator than complacency, and emotional liquidation from frustrated long holders can lead to quick declines.

Choosing shorts
Timing need to be more accurate when it comes to shorts, in bear environment, try to concentrate only on the highest probability setups, and keep overall trading activity low relative to your trading volume in a bull market. you need to have the patience to let the market present you with the lowest-risk opportunities. This occurs when the trend are aligned on multiple timeframes.
Some of sharpest rallies experienced by stocks occur during a downtrends, and while these rallies usually fail to hold up in a down trending stock.
Trend trading is the safer way to consistent profitability, so do not allow yourself to be enticed by the rapid movement.

Short alignment
Trend alignment of short trading positions is the lowest-risk, highest-profit potential trade scenario. Whether we trade long or short, the basic cyclical structure of the market never changes.

Find the candidate with daily timeframe
The first step in trading short is to find a stock in an established stage 4 downtrend. when trading from the short side, we ideally want the overall market, the sector and the stock to be in a decline.
In digital currency market, we hope the bitcoin is in decline when shoring the alt coins.
And if the daily MA 10-, 20-, 50- stacked below each other 10<20<50 is another bonus for shorting. let apply these rules.

Shorting choose in bear market

07. Feb 2014, lower high formed in Jan 11, and consolidate in the neck line range ~ 790, but after 1 month, the market choose downside direction, when 07.Feb 2014, we can see obvious MA stacked 10<20<50, it's a sign of bear formed, good point to start short.

13.Aug 2014, lower high formed in 01.July 2014, and break the neck line in 14.Aug 2014, with daily MA 10<20<50 stacking, good point to shorting.

05.Mar 2018, daily double top seems formed, this chart pattern in bear market have strong power to drive the price down. we can setup shoring with stop loss in here.

05.May 2018, daily double top formed, we can shorting with stop loss from here:

29.July 2018, bitcoin price formed lower high in daily chart . shorting!

14.Nov 2018, bitcoin break the major support which support bitcoin ~ 1 year. the longer the hold, if breaks, the large dump will happen. shorting without reasons!

Shorting in bull market
I have to say shorting in bull market is very risky, bulls driven by FOMO of crowd. Don't short in bull market otherwise you're very experienced in trading. And one rule we should always keep in mind is we should ride the trends, not try to violate or control it.
So in bull market, just find the right position to long, don't try to stand on the oppose/low possibility position.
Comment: When we have chosen a good candidate for shooting, next is to find the best timing for short, so zoom in the chart patten should be considered. 15/30 min is good for mid term analysis, 1/5 min is used for best timing choice.

For a experienced short, must be a great trend rider, a hunter, waiting the short opportunity patience, cancel shorting if downtrends break or any abnormally scenario happen.

Let's look at the 1/4 hours pattern, such as 05.Mar.2018 bitcoin, market back into bearer after a double top formation in daily patter.

When I look at the downtrend pattern, some interesting points found:
-usually the downlink slope in the beginning of down is largest, after a period of time a new down trend line formed with relative small slope
-we should hold the short position when lower high and lower low not change.

1/4 H chart pattern help us have the big picture of whole trends of market, red circle is the lower low, green circle is the lower high, you can see in the period of downtrends, no higher high formed, so we should hold our short position as long as the fact / trends change.

Trends change usually confirmed by the down trends channel break up or higher high / high low formed. and usually a higher low formed before the higher high. if these cases happen, we may consider to decrease our short position.

15/30 min pattern is good to find the short-mid term enter/exit short position.

Let's look at some examples for the 15/30 min pattern, since old 15/30 min history data is not available, I will use the latest data for example.

This is the latest pattern of bitcoin, June of 2019, after a FOMO bull run, a big correction happen, let's look at 15min pattern, a clear down trend channel form, it's easy game for shorter.

shorter should hold as long as trend channel change, as the green circle, especially a higher low formed, confirmed the trend reversal in short term. short position should be decreased here(yellow circle). this also can be used for longer when trade in uptrend channel, until the up trend reversal.(red circle)

15/30 min time frame are also good for find the support levels when we short.
The support level usually are the main trading region when stock in up trends. such as, the longer a stock trading in a specific range, the support will be stronger. and if the stronger support break, big dump will be happen usually.

Naturally, we hope the stock will crash all of the potential support level of 30 min time frame, but we need to keep our emotions out of equation as much as possible and be alert to the areas where momentum may slow.
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