Portfolio Boss Documentation

A Strategy for Short Selling

 

 

Portfolio Boss is generally used for trading Long Positions, but if you're a short seller, you can still use this Platform to help with your trades.

Note that some licenses do not allow you to create Short Positions.

 


 

Definition of Short Selling

 

Short Selling means you're entering Positions by selling instruments (shorting the instruments), in the hope that their prices will decrease. These sold instruments are not yours; they're borrowed from your broker and you have the obligation to return them. So, after you sell them, you close (exit) the Short Positions by buying back these instruments (covering the instruments) at such a low price. You'll profit when you bought the shares (to return to your broker) at a lower price than the selling price.

Short Selling is an advanced trading method that carries a much bigger risk than the usual Long Positions. That's why we don't include any strategies created specifically for Short Selling. You must understand the dangers, and execute such trades at your own risk:

 

  • Short Selling exposes you to unlimited losses. Here's why: You lose when the buying price is higher than the selling price, and since stock's price can go upward without bounds, there's no limit to your loss. As you already know, stock's price does have a floor, i.e 0 dollar amount. But it doesn't have a ceiling; it can go to heaven and beyond. Compare that to a Long Position, in which you buy shares for $1000. At the worst case scenario, when the stock's price plummets to $0, you'll only lose $1000. But if you're entering Short Positions, and the price goes higher than the Empire State, you may as well file for bankruptcy.

 

  • Since you're essentially borrowing stocks, you have to pay interest to your broker as long as the Positions remain open. This could be disastrous if you keep waiting for the right buying price. Some brokers even impose a set deadline for returning the borrowed instruments. A Long Position on the other hand, allows you to ride the market for as long as you want, without any interest.

 

  • There's a dangerous feedback loop called Short Squeeze, in which the stock's price goes up and causes some Short Sellers to panic and buy back these stocks. Since more people are buying these stocks, prices will go up even further (the law of supply and demand), thus prompting other Short Sellers to close their positions (buy back the stocks to limit their losses) and increasing the prices even more. This loop goes on until you have to pay a hefty amount to close your position (if you can still find any leftover stocks).

 

All that being said, such risks also carry big quick profits. So, let's now cover what Portfolio Boss has to offer regarding Short Selling.

 


 

Strategy Rules for Trading Short Positions

 

 

1.  Position Type (System Settings Panel): In Portfolio Boss, you can generate Short Positions by changing this rule into “Short”, instead of the usual “Long”. 

 

 

Setting it to “Short” will change the behavior of some parameters. So, we need to revisit each relevant parameter in the sections below.

If you have a limited license, this parameter will not be available. Therefore, you will be using Long Positions by default. Please contact our Customer Support if you wish to upgrade your license.

 


 

2.  If Position Triggers Cover Filter, Replace With (System Settings Panel): this is how you want to park your money after closing the Short Position. You can choose either “Cash”, which means your money will be idle, or “Cash Equivalent” so that your money will grow a little. 

 

 

In other words, after a Short Position is covered (the stocks are bought back) you want to enter cash or cash-equivalent before executing another Short Position at the next switch day. This rule is only available if the “System” rule is set to “Periodically Switch Positions”.

Keep in mind, during tough recessions (strong bear markets), a cash-equivalent such as bonds may not be attractive at all. With rising interest rate, existing bonds prices tend to fall; not to mention the higher risk of defaults by bond-issuing companies. Therefore “Cash” could be used as safe-haven during such times. You may also want to use “Cash” while creating and backtesting the strategy (spanning multiple tough recessions in the past).

 


 

3.  If Position Triggers Cover Filter … Replace With (System Settings Panel): this rule is only available if the “System” rule is set to “Continuously Switch Positions”. 

 

 

This rule essentially tells you that once a Short Position is covered (the stocks are bought back), the strategy will automatically enter the next Short Position. But if there's no profitable Short Position to be entered, PB will park your money into cash or the cash-equivalent.

 


 

4.  Short Order Type (System Settings Panel): with this rule, you can short (sell) the borrowed instruments with either a Market Order or a Limit Order. With Market Order, the instruments are sold at the latest market price when you input the order to your broker. 

 

 

With “N ATR Limit Order”, the instruments are sold only if the limit price (or higher) is met.

The limit price is calculated with the next parameter (“Short Order Limit”), and you input to the broker the resulting limit price.

After giving you the Short Signal, PB will look at the next day's High price to determine if the Limit Order is met. If it is, then your Short Position is considered entered; if it's not, then the Position reverts to a Cash or Cash Equivalent until the next Short Signal is given (or if a switch day arrives).

Note that some licenses can't use Limit Orders, thus defaulting to Market Order. If you wish to upgrade your license, please contact our Customer Support team.

 


 

5.  Short Order Limit (System Settings Panel): this calculates the short limit price that you'll input to your broker. With this Limit Order, the instruments are sold only if the price is equal or higher than: the previous day's close plus a multiplied ATR. 

 

 

The reason is that you want to sell these instruments at the highest price possible while anticipating the price to go lower.

The first parameter defines the ATR multiplier; you can set this either greater than 1, or a fraction of 1. But keep in mind, anything greater than 1 means your Limit Order is not likely to be filled, since you're looking for a price movement beyond the average.

 

 

Worse still, if you're looking at a stellar price 3x the ATR, there's a good possibility the instrument will reverse toward an Uptrend.

Now, the second parameter defines the number of days to look for the Average True Range.

 

 

If you use a Short Limit Order, a “Short Limit” indicator will be shown on the instrument's Price Chart. Look for a price bar whose High is equal or higher than this indicator-line.

 

 


 

6.  Cover Order Type (System Settings Panel): with this parameter, you can cover (buy back) the instruments with either a Market Order or a Limit Order. With Market Order, the instruments are bought at the latest market price when you input the order. 

 

 

With “N ATR Limit Order”, the instruments will be bought only if the limit price (or lower) is met.

So essentially, the strategy calculates the limit price with the next parameter (“Cover Order Limit”), and then you input the resulting limit price to the broker.

After giving you the Cover Signal, the strategy will look at the next day's Low price to determine if the Limit Order is met. If it is, then your Short Position is successfully closed; if the Limit isn't met, then the Position continues until another Cover Signal is given (or if a switch day arrives).

If you use a Cover Limit Order, make sure at least one of the Cover Filters is set to “Limit Order” instead of “Market Order”. Go to the Cover Filters Panel (previously known as the Sell Filters Panel) and change any Cover Filter there to use Limit Order. Cover Filters there that use Limit Order may serve as profit-taker filters, while those with Market Order can serve as stop-loss where you must sell immediately at whatever market price, instead of waiting for a limit price to be met.

 

 

Note that some licenses can't use Limit Orders, thus defaulting to Market Order. If you wish to upgrade your license, please contact our Customer Support team.

 


 

7.  Cover Order Limit (System Settings Panel): this calculates the Limit price that you'll input to your broker. With this Limit Order, the instruments are bought only if the price is equal to or lower than: the previous day's close minus a multiplied ATR. 

 

 

The reason is that you want to buy these instruments at the lowest price possible before the stock rallies again, so essentially you're looking for a further discount.

The first parameter defines the ATR multiplier, you can set this greater than 1 or a fraction of 1. But keep in mind, if you're looking for a price drop greater than the average, your Limit Order isn't likely to be filled.

 

 

The second parameter defines the time period to calculate the Average True Range:

 

 

Note, if you use a Cover Limit Order, a “Cover Limit” indicator will be shown on the instrument's Price Chart (at the Instrument Tab). Look for a price-bar whose Low is equal to or lower than this indicator-line.

 

 


 

8.  Short Filters Panel: these filters select instruments in your Portfolio that are potentially profitable to be Shorted. In other words, think of these filters as the Buy Filters that you're already familiar with. 

 

 

You can craft your own rules on what instruments to look for; but generally you want downtrending instruments whose prices are still high (or instruments that just experienced a reversal from a peak). Note, for an instrument to be considered, it must fulfill all the rules listed here.

After these instruments are filtered, they will be ranked according to the Ranking Rules you set below this panel. Only the “top n” instruments will be entered as Positions (“n” according to the rule “Total Positions to Hold”).

 


 

9.  Cover Filters Panel: these filters define the criteria for closing the Short Positions, so you'll be covering (buying back) the shorted instruments. Think of these as the usual Sell Filters that you're already familiar with. 

 

 

Generally, you want to close downtrending Positions that are likely to make a rally (or Positions that have just experienced a reversal from a trough).

For a Position to be closed, only one of these filters need to be met, not all of them.

Once the Position is closed, the strategy will recommend you to buy a cash-equivalent to park your profit before entering the new Short Position at switch day (this applies for a Periodically Switching strategy). Or it will recommend you to replace the closed Position immediately with the new Short Position (applies for a Continuously Switching strategy).

 


 

10.  In a Short Strategy, the Trade Signals Panel will show “Short”, “Cover”, “Buy”/”Sell” (cash-equivalent), and “Hold” instead of the usual Buy/Sell signals. You can also see the limit price for each signal (if the strategy uses a Limit Order).

 

 


 

Note:

 

A short strategy is best employed in tandem with a long strategy. You can achieve this with multi-strategy. Therefore the short strategy kicks in during rough times for the long strategy. In the long run, a short strategy by itself rarely gives acceptable return. It may even reduce your original account balance to zero dollar (worse yet, negative balance, because there's no ceiling on stocks prices). The key is to short at the right times, not all the time; then during market turmoil, you may hit a large mother lode very quickly.

The reasoning is simple: markets tend to go up in the long run. But when they do go down, they do it in a mighty drop that's much quicker than they go up.

 

 

Another way to initiate short positions in Portfolio Boss is by using inverse ETFs, as described here.

 

 

 

Back to Top

 

 

>