Ten Roadblocks to Profitable Short-Selling

This column was originally published on RealMoney on Nov. 29, 2007 at 12:46 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

Short-selling has come back into vogue in recent months, with the major averages convulsing in response to the mortgage crisis. In fact, we've seen more downside pressure this year than at any time since the 2000-to-2002 bear market. This decline has forced a cadre of long -only traders and investors to revisit this classic strategy.

But short-selling's popularity can be a contrary signal, because bad things will happen when that side of the market gets overcrowded. This is especially true after amateur shorts apply the same methods they use in their stockpicking, but in reverse. In other words, they chase downward momentum without an understanding of the considerable risk .

Despite the threat of unexpected squeezes, short-selling could be the hottest game in town in 2008. Just keep in mind that it's still not easy to make money selling first and buying later. In fact, most readers will stare at falling prices for hours, and then enter their sales at exactly the wrong time. This is one of the great truths of this trading methodology.

I've compiled 10 of the most common roadblocks to profitable short-selling. Review the list and understand why this practice can cause so much pain and suffering, when misapplied. Also, remember that a downtrend makes short-selling even tougher at times, because it's harder to find your edge against other traders playing the same game.