How to Short Stocks
The ProTrend 50/50 Strategy is a trend trading method that is primarily used for long positions, but it also works well as a framework for shorts. To short with the 50/50 Strategy, simply flip the rules upside down.
For longs, the trader wants to buy when price is "above" a "rising" 50 EMA and the RSI 20 is "above" the "50" level. So to short, sell when price is "below" a "falling" 50 EMA and RSI 20 is "below" the "50" level. These two rules are the core strategy, but it is wise to fine tune the entry using volume, momentum, etc.
An good short example can be seen in the chart of Borg Warner (BWA) below.
In the daily chart of BWA, price formed a bearish head & shoulders pattern which became the top. Price crossed below the 50 EMA in late July and RSI 20 fell below the 50 level. When this happens, one watches for a rebound back above the 50 EMA. A weak rebound makes the stock a short candidate.
In August and September, price attempted to regain the 50 EMA, but failed both times and showed its weakness. By this time, the 50 EMA had turned "down." At this point, price was below a falling 50 EMA (first rule met).
RSI popped above the 50 level during the two price tests of the 50 EMA. If you study momentum, this was an example of "reverse divergence," a bearish clue that is helpful know. In September, RSI fell back below 50 (second rule met). One day later, price broke below its support line (black). Now it was time to consider shorting.
BWA sliced below its 200 SMA and fell precipitously on high volume (not shown) and remained under its 10 SMA (blue dashed line). As price continued to decline, the 50 EMA crossed below the 200 SMA; this is a bearish cross, sometimes referred to as the "black cross" or "death cross."
The BWA chart is the classic 50/50 Strategy short (although there are other variations). If you are new to shorting, you may want to print out the BWA chart for future reference. Shorting is not easy, so it helps to have a set of rules to keep you oriented.