Hi Michael,
I love One Good Trade. A book on Trading has never been so insightful yet so simple and engaging. Even Mark Douglas and (xxxx) can borrow a leaf or two from the simple, familiar language. I love it. Currently shopping for The PlayBook.
Back to trading; in ‘One Good Trade’ you advise traders to avoid stocks with high short interest even when such stocks are ‘IN PLAY’. What you did not make clear is the threshold and rationale.
Please answer for me these two nagging questions?
What are the possible implications of short interest (high or low) on a stock on intraday trading?
At what point do you decide the short interest in a stock is too high for such stock to be tradable intraday? Above 10% of the float, or 20% or is it 30%?
I personally have a psychology that makes me view a bad trade as a mistake even if it gives me the biggest win of the month. I don’t believe in winning the wrong way. This Tuesday I went against this mindset. I made a decent sum from SRPT on FDA news despite the massive short interest in it. I felt guilty and since the mind tends to subconsciously validate such wrong plays, I tried to repeat a similar move in AERI (Gaping up 65% Pre-Market on News of FDA approval of a drug) yesterday with disastrous consequence; a rip bigger that all wins in the week (the market always has a way of dealing with stubbornness, right? …and boy, just like my mun, it taught me to show some respect yesterday). This took me back to your assertion on short interest and thus the questions.
Hope to hear from you soon. Keep up the good work.
(email edited and shortened by author)
@MikeBellafiore
For new traders, we teach them to stay away from stocks with a short interest above 30 percent. This breeds moves that are too choppy for new traders to handle. I wrote about this challenge in a past post, The face of high short interest. We use this as a guideline for new traders and do allow for certain exceptions.
Further, as traders develop they can trade stocks with a higher short interest. They know to give these trades a larger stop and tread more carefully because of the potential for spikes to the upside.
Before a new trader makes a trade they must know the short interest in the stock. It is hard to get the right trading experience without knowing key data about a stock. This key data helps you better understand a stock’s moves.
New traders want trade experiences from which they can best learn. This is one reason why we encourage Stocks In Play. The stocks move. There are a lot of trading opportunities and different ways to attack the stock. There is a lot of learning trading these stocks for the prepared trader.
With a stock that has a short interest above 30 percent, some of the moves are difficult to game and understand. Was that crazy spike a buy in? Was that crazy spike short covering by bad traders? Was that crazy spike a real buyer stepping in desperate for the stock? Since it is difficult to answer these key questions, it is harder to learn from trading these stocks. And thus they are not optimal stocks for which to trade when a new trader.
Further high short interest stocks can cause large rips, for which a new trader cannot sustain.
I hope that helps.
Related posts
The face of high short interest
The fundamental catalyst that made ORCL a good short
*no relevant positions
