A Refresher Course on Going Short

In Saturday's column, I discussed how it was possible to "time" the market. But, if you picked up nothing else, you realized it wasn't magic to be able to identify a trend.

Lately, of course, that hasn't been difficult. The market has been heading straight to the dumper. However, as I've talked about numerous times, that can be a prosperous time for a trader willing to go short.

Therefore, a quick refresher on some standard short plays I make, plus a few I add to my arsenal when it's obvious the market is getting slammed. Five charts, five different plays. All can make you money. Read on.

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A few further thoughts:

I sometimes use a limit price to get in. This has the benefit of preventing me from getting filled on a rebound after the stock has cratered in the morning. The risk, of course, is that sometimes stocks never come back and your "smart" limit order can cause you to miss a nice winner.

Another option is to scale into a trade. If the stock is volatile and I'm using a wide trailing stop like a 20-day moving average, I'll do this if the stock continues to move up on declining volume.

As for stops, I usually like my initial stop to be a tick above the previous day's high. Of course, you can use a standard percentage, but be careful to vary that depending on how volatile the stock is.

As for the other side of the equation, the profit target, there are numerous ways to go about this. Normally, I like to use a standard percentage target of 5%. However, on something like Interwoven (IWOV:Nasdaq - news - boards), you can easily get away with 10% or even more.

Another alternative, especially in a bear market, is to simply use a trailing stop. With stocks that have just broken down, I've found both a 10-day and 20-day moving average work very nicely. Doing that will give you whipsaws, but it will also yield huge gains and alleviate trying to get short when the market gaps down from the open.

Finally, keep in mind that some of these strategies can be used year-round, but others, like the minitrendline break, should be reserved only for stocks already in a downtrend, and only during a bear market.

OK, that's enough to digest for now. My suggestion? Get your charts out and start looking for these same patterns. Trade them on paper at first to make sure you're not forcing anything, and then start with a small amount of money. When I try new approaches, it's sometimes with a lot size as small as 50 shares. Remember, you want to learn in a real, live environment. But you don't want to get killed doing it.

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Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes five technical analysis columns for TheStreet.com each week, including Technician's Take, Charted Territory and TSC Technical Forum. While he cannot provide investment advice or recommendations, he invites you to send your feedback to Gary B. Smith .