|
Written and copyright © 2008-2013 by Thomas N. Bulkowski. All rights reserved.
A question I am asked frequently is why I do not recommend shorting a stock. The answer is simple. You can make more
money from the long side than the short side, even in a bear market.
For proof, I used 500 stocks from 1991 to 1996 and another 739 from 1995 to 2005 and found 12,385 chart patterns. I measured the rise from the breakout price to the ultimate high,
which is the highest high before price drops by at least 20%. For downward breakouts, I measured the decline from the breakout price to the ultimate low, which is the
lowest low before price rebounds by at least 20%.
Average Rise or Decline
The following table shows
the average rise or decline of perfectly traded chart patterns without any fees
deducted. I split the yearly price
range into thirds and measured the performance of the 12,385 chart patterns,
placing each in one of the three categories according
to the breakout price. Comparing the long versus short numbers, going long in both
bull and bear markets beats going short
in either a bull or bear market.
For example,
those chart patterns with breakouts within a third of the yearly low showed gains
of 38% in a bull market, but shorting in
a bull market produced a gain of just 19%. In a bear market, going long made an
average of 32% but going short made just 26%.
Market condition
Trade direction | Lowest
Third | Middle
Third | Highest
Third |
| Bull market long | 38% | 35% | 36% |
| Bull market short | 19% | 17% | 16% |
| Bear market long | 32% | 27% | 23% |
| Bear market short | 26% | 23% | 22% |
Failure Rates
The following table shows failure rates over the same three yearly trading ranges. The easiest way to explain
the failure rate is to cite examples. Using the Lowest Third captioned column (those chart patterns with breakouts within a third
of the yearly low), 4% of the chart patterns I looked at failed to rise at least 5%, and double that -- or 8% -- failed to drop
at least 5%. The next two rows down: 12% failed to rise at least 10% and 24% failed to drop at least 10%. In all cases,
shorting a stock after a chart pattern breakout means an increased risk of failing than if you were to go long.
Failure
Rate | Lowest
Third | Middle
Third | Highest
Third |
| 5% long | 4% | 5% | 7% |
| 5% short | 8% | 9% | 15% |
| 10% long | 12% | 17% | 18% |
| 10% short | 24% | 28% | 34% |
| 15% long | 22% | 29% | 29% |
| 15% short | 39% | 46% | 51% |
| 20% long | 32% | 39% | 38% |
| 20% short | 53% | 63% | 66% |
| 25% long | 41% | 48% | 47% |
| 25% short | 65% | 74% | 78% |
Another Look
Having said that long trades work better both in reward (the rise to the ultimate high) and risk of failure, let me add this thought. Since gains in a rising market can be unlimited,
and you can only lose 100% of your money by shorting a stock (excluding leverage), the comparison of the long side to the short side is probably unfair.
-- Thomas Bulkowski
Copyright © 2008-2013 by Thomas N. Bulkowski. All rights reserved. Beauty is only skin deep, but ugly goes down to the bone.
|
. If you buy ANYTHING, they pay for the referral.
on 