How short selling day traders can recognize the back side.

It’s well known and documented that I’ve been caught on the front side of day trades way too many times. It happens to all short selling day traders at one time or another but it has happened to me a few times too many.

I needed to sharpen my day trading and, in particular, short selling game, so I joined My Investing Club. One of my first and most valuable takeaways to date is how day traders (long and short) can establish and understand the front side versus the back side of a day trade.

Below I’ve detailed how I’ve understood and applied these rules for safe and effective day trading.

But first, to short small cap stocks day traders will more than likely need a broker that specializes in short selling. Learn more about the broker I use TradeZero.

The main front side indicator: The stock is green

(ZeroPro Charts,  June 15, 2022)

This indicator makes a good first point for judgement. If the stock is green on the day and above VWAP it can be considered front side. If it’s red or below VWAP we may look to consider it back side. Likely there will be some grey areas but this can be a starting rule of thumb.

That doesn’t necessarily mean shorting front side or shorting stocks that are green on the day is necessarily bad day trading. But, there is definitely a fine art and process to selecting and sizing into the front side. A day trader must have caution, however, because if the day trader is short and early without the discipline to cut, this can happen…

(ZeroPro Charts,  June 15, 2022)

For example, imagine If the day trader is executing trades early here, in the $1.20s – $1.40s, without any risk management, a bad loss is likely as the stock peaked out in the $4.40. The total move that this stock made was around 400%.

This mentioned stock is a recent IPO that has historically traded light volume so was likely an avoid short for many day traders anyway. For other stocks, an argument can be put forward to say that they are worth shorting front-side, I learnt in MIC that day traders should use anticipation size, which is 30% of the trader’s planned trading size front side.

When back side turns to front side.

This is where it gets a little bit more interesting because on any given day a stock can switch from front side to back side or vice versa as a day trade.

(ZeroPro Charts,  June 15, 2022)

Notice how this stock, which opened red after a big day one move, went from red to green on the day. In this scenario it could be argued that the pattern went from a back side to a front side day trading opportunity.

When front side turns to back side.

(ZeroPro Charts,  June 15, 2022)

If the stock is green on the day but falling under VWAP I’d likely qualify it as back side or nearing the back side.

VWAP is an indicator is defined below by Investopedia:

Volume-weighted average price (VWAP) is a commonly used benchmark derived from a ratio of the average share price for a stock compared to total volume of shares traded over a particular time frame. This measure helps investors and analysts evaluate the current price of a stock and determine whether it is relatively overpriced or under priced compared to the average trading price for the day. Often this information is used to facilitate the entry or exit of a position.

Generally it is considered – if the stock is above VWAP buyers are in profit so therefore the stock is still front side. If it is under VWAP, buyers are under water and shorts are more in control, so it’s therefore backside.

My $AERC (back side) Day Trade

(ZeroPro Charts,  June 15, 2022)

This day-trading pattern worked very well to the short side for three key reasons:

  • The stock was over-extended on the daily chart
  • It was on its first red day
  • I could use VWAP as resistance and as another confirming indicator that it was trading on its back side trading.

Granted, I may have covered a little too early in the morning’s short but I’d argue no one has ever gone broke taking profits and I’m still a noob with this trading style.

The market certainly seems to be heating back up, I’m now just preparing daily to refine my process for a strong second half of the year without getting squeezed.

I hope this helps any and all aspiring short selling day traders to avoid the front side of their next day trade. We trade against each other on a daily basis but that doesn’t mean retail traders can’t share some knowledge to help each other out.

This content (“Content”) is produced for TradeZero and Stephen Johnson is compensated for his involvement. The Content represents only the views and opinions of Mr. Johnson. Mr. Johnson’s trading experiences and accomplishments are unique, and your trading results may vary substantially. The mere appearance of the Content on a TradeZero website does not constitute an endorsement by TradeZero of such Content and TradeZero does not make any representation or warranty with respect to the accuracy of the Content.  The Content has been made available for informational and educational purposes only and should not be considered trading or investment advice or a recommendation as to any security. Trading securities can involve high risk and potential loss of funds. Links to third party sites are not under the control of TradeZero and TradeZero is not responsible for the accuracy of the content on such sites. Mr. Johnson may also receive compensation for customers he introduces to TradeZero.
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