As I observe, a lot of traders either open buy positions merely or open sell positions merely especially when the oil price is volatile. When the oil price goes the opposite direction, they will hold it, hoping that it will divert o the direction they want in no time but most of the time, it doesn’t happen and usually end up hitting stop loss. Or they will choose to open more positions, if they are buying, they will continue to buy more, also hoping that the price will rebound, but usually it doesn’t work as what we want.
Before I start to share about the tactic of using short selling, I would like to say that it only works when you do not put all your balance into trade. You must always have balance that will back you up. For example, if you are planning to open a position with $2500, you must have at least balance of $10000, which is around four times of your initial trade, I will explain in more details later.
So this is how I usually do, but it may not work every time with profits but at least it definitely protect you from big loss. I would rather explain with an example which I think would be more practical and easier to understand.
Let’s say the oil is priced at $70 this morning, and the EIA Crude Oil Inventories Report is coming out soon. I open a buy position with $3000 @ $70 as I think the report is going to be bullish for oil price.
If the price spike to $70.4, I open a sell position with $1500 @ $70.4. If the price of oil continue to spike, I open another buy position of $3000 @ $70.8 and a sell position of $1500 @ $70.8. So, the average would be a buy position of $3000 @ $70.2. If the price continue to rise, I will still get profits but would be lesser due to the two sell positions that I’m holding. Although my profits would be greater without the sell positions, but if the price suddenly drop to $70.2, I will be having no net gain or loss (would be a loss if I didn’t open the sell positions).
In simple words,
With holding buying and selling positions,
Buying $3000 @ $70
Selling $1500 @ $70.4
Buying $3000 @ $70.8
Selling $1500 @ $70.8
Overall buying $3000 @ 70.2
Result: Lesser gain if continue to rise, no net gain if it drop to $70.2
With only holding buying positions,
Buying $3000 @ $70
Buying $3000 @ $70.8
Overall buying $6000 @ $70.4
Result: Greater gain if continue to rise, net loss if it drop below $70.4
So, it is clear that, holding both buying and selling positions at the same time will give you a lesser profits, but it lower your risk of losing your current profits, preventing you from losing more than your current profits (hopefully), which is what usually seen if there is a sudden drop after spike. The reason why I “unnecessarily” open the sell positions is that most of the time we can’t predict how much the price will go up or down, like a roller coaster within few minutes. I open the sell positions in the condition that I would like to hold awhile more (maybe few hours to few days), but I would afraid that my current profits would just gone with a sudden dip, it is just like having “extra insurance” to secure your current profits.
If the price is stable after that, I would choose to close all the positions, enjoying the net gain. If the price continue to climb, maybe I would either choose to close the sell positions and open the sell positions @ higher price or I can buy more.
By the way, holding both buying and selling positions at the same time will need more balance as you may continue to open more buying or selling positions according to the situation. Also, you might need to extend your stop loss for some positions. No worries about the overnight fees, as long as your overall is in buying position, your overnight refunds is more than enough to cover your overnight fees.
“This is not an investment advice”. This is just an explanation on how short selling would become a great tool for wise traders. Of course this explanation is not complete as what if the price goes down, so this is basically just a simple explanation to understand how short selling works. PRACTICE with your VIRTUAL account first before using your real account, so that you are familiar with using short selling since it might require some experience and rapid response to obtain the perfect balance. And there are too many possibilities that could happen. Last but not least, the concept also applies to other volatile trading as well.