Short Selling & Short Interest: How to Short Small Cap Stocks | Trade The Pool — Transcript

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1. 0:00Traders, this is Kevin Avery, small cap
2. 0:02analyst over at Trade the Pool, and
3. 0:04today I'm going to be sharing with you
4. 0:05the secrets to shorting small caps. Now,
5. 0:08there's usually always an edge available
6. 0:11in small caps for shorting, and I think
7. 0:13it's become overcrowded over the years.
8. 0:15That's what I've seen in this. That's
9. 0:17why you see so many short squeezes. You
10. 0:19get the float is just such a high short
11. 0:21interest. Think of GameStop. You get a
12. 0:23lot of those names like that because
13. 0:25these are most junk companies. Uh
14. 0:28they're looking to raise capital. Uh but
15. 0:30there's a lot of FOMO out there. So,
16. 0:32those two things combined, you have FOMO
17. 0:35and you have companies that are losing
18. 0:37money and they need capital, that
19. 0:39creates an edge. But the problem is
20. 0:42we've been seeing a lot of these names
21. 0:43get overcrowded on the short side, which
22. 0:45creates so much buying pressure as
23. 0:47shorts have to cover, longs coming in to
24. 0:49squeeze them out. A lot of these longs,
25. 0:51they don't want to be a long-term
26. 0:52investor in this company. Often times,
27. 0:54they're just looking for maybe a little
28. 0:56scalp, and then they become a long-term
29. 0:57investor, and that's when the deer in
30. 0:59headlights sets in, analysis by
31. 1:01paralysis, they become long-term
32. 1:02investors, the company goes to zero.
33. 1:04Most of them do. It's just a matter of
34. 1:05timing. Timing is key in small caps.
35. 1:09Timing is very key. We're going to get
36. 1:10into all of it, guys, but A, you have to
37. 1:12be able to identify your edge.
38. 1:16I know traders always say that is
39. 1:18cliche. Plan the trade, trade the plan,
40. 1:20identify the edge, but you have to have
41. 1:21it. You have to know what you're trading
42. 1:23cuz random trading is going to equal
43. 1:26random results. And [music] random
44. 1:28sizing is going to equal random results.
45. 1:31We all we have to really clean it up in
46. 1:33trading.
47. 1:34>> [music]
48. 1:34>> Uh and so, you're probably watching this
49. 1:36video because you were once a long
50. 1:39that's had enough of the long side in
51. 1:41small caps. Sure, there is opportunity
52. 1:43there. I'm not saying you can't have an
53. 1:44edge on the long side. Uh there are
54. 1:46plenty of traders that trade
55. 1:47consistently on the long side. I'm here
56. 1:50today to teach you how to short these
57. 1:52plays and how to identify setups. Uh
58. 1:54there's a lot to it. So, you have what?
59. 1:56You have A, identify the setup.
60. 1:59That's key. That's the first thing. And
61. 2:00we're going to go over some setups that
62. 2:02I find to be my favorite, highly
63. 2:04profitable uh edges, in my opinion. And
64. 2:07then B, after identifying the setup, you
65. 2:09need to really have the discipline to
66. 2:11just trade that.
67. 2:13Just trade that. I mean, you can't be
68. 2:14trading any and everything. It's like,
69. 2:16"Oh, I got stopped out there. Now let me
70. 2:17reverse." Or like, "That's Let's trade
71. 2:19this, that, long, short, left, right."
72. 2:22You're just doing every You're doing too
73. 2:24much. You're addicted to the degeneracy
74. 2:26of trading. We have to really hone in.
75. 2:29So, you got to identify it, have the
76. 2:30discipline to just trade it. C, you have
77. 2:33to have the risk management The risk
78. 2:34management in place, which means what? I
79. 2:36mean, that you have to stick to the
80. 2:37risk, embrace it, accept those results.
81. 2:39You have to eliminate expectations.
82. 2:42So, what are expectations? Expectations,
83. 2:44they say,
84. 2:45you know, I I expect this ticker to do a
85. 2:48certain thing, and if it doesn't,
86. 2:50well, pretty much you're tilted at that
87. 2:52point, and you trade tilted. Maybe you
88. 2:53stop out, but then you resize it. You
89. 2:55get involved heavier than the initial
90. 2:57trade. So, essentially, you're holding
91. 2:59and hoping any regardless on the trade.
92. 3:02So, you have to be able to blacklist
93. 3:04tickers. This is something I see a lot
94. 3:05of traders they learn over the years,
95. 3:07but they'll be tunneled into one ticker.
96. 3:09This is my favorite setup. The
97. 3:10fundamentals are great, or they're
98. 3:12terrible, so I'm heavily short, or I'm
99. 3:14heavily long. They fall in love, fall in
100. 3:18love with the ticker.
101. 3:20>> [sighs]
102. 3:21>> That's a different video.
103. 3:23They fall in love with this ticker, and
104. 3:25the ego trades for them. You cannot let
105. 3:27your ego trade for you. It's a very
106. 3:29expensive mistake to allow the ego to
107. 3:32trade for you. I mean, very expensive.
108. 3:35So, identify the setup, discipline to
109. 3:37just trade that, risk management to
110. 3:38protect yourself. So, maybe if you took
111. 3:40took a max loss on that trade, blacklist
112. 3:42it. Don't trade anymore. No one ticker
113. 3:44is ever worth your entire account,
114. 3:46certainly not your entire day, either.
115. 3:48It You just have to have the discipline
116. 3:51to walk away from a ticker. if it's not
117. 3:53working. It's not working. And sometimes
118. 3:55these tickers, especially in small cap
119. 3:57land, guys, they can run irrationally,
120. 3:59and more rationally than you can think
121. 4:01of. I mean, I just, for example, BNAI is
122. 4:04a ticker that just went from a few
123. 4:05dollars to 60. Short squeeze. I was
124. 4:08there on the backside for a short, which
125. 4:09worked out great today, and we're going
126. 4:11to go into that strategy.
127. 4:13Um, but you have you have to eliminate
128. 4:15the ego.
129. 4:16Eliminate expectations, because there's
130. 4:18a random distribution between your
131. 4:21winners and your losers, and you don't
132. 4:22know what that's going to be. So, to put
133. 4:24yourself in a position where a trade has
134. 4:26to do a certain thing,
135. 4:27that's that's the wrong idea, in my
136. 4:29opinion. We're we're about series of
137. 4:31trades. Less prediction, and more just
138. 4:34the over the series. We're the house in
139. 4:36the casino, right? It's like we don't
140. 4:38know what's going to happen necessarily
141. 4:39on this one trade, but we know what the
142. 4:41results are going to We know where the
143. 4:42equity curve is going over thousands of
144. 4:45trades. So, that's where we got to get
145. 4:47uh risk management, and then the lastly,
146. 4:49you need the consistency
147. 4:51to compound that over time. So, identify
148. 4:54the setup, discipline to just trade
149. 4:55that, risk management to protect it,
150. 4:58and then and preserve the capital, and
151. 4:59then the consistency to just trade that
152. 5:01and compound it over time. Now, I'm not
153. 5:03saying you can't trade anything else.
154. 5:06When I say the discipline to just trade
155. 5:07that,
156. 5:08uh
157. 5:09that's where that's more in a more
158. 5:11advanced video, because let's say this
159. 5:14setup that I'm going to share with you
160. 5:15today is my A+ setup. So, if I'm at the
161. 5:17poker table and I get pocket pair of ace
162. 5:19hands, I'm going to size this hand a
163. 5:22little differently than I'm going to
164. 5:23size a different hand. But, I do trade
165. 5:25many edges in the market. It's not
166. 5:27random trading, but I might I might take
167. 5:30the euphoria into a descending triangle,
168. 5:32take that short, look for a little piece
169. 5:33there, or the ascending triangles, the
170. 5:36bull flags, the bear flags, the head and
171. 5:37shoulders, inverse head and shoulders,
172. 5:39but I know pretty much where
173. 5:42how I should size based on
174. 5:44how I've seen these plays work out over
175. 5:46the years. So, sizing based on is this a
176. 5:48pocket 10 hand? Is this pocket twos?
177. 5:51Like it should I just fold this or not?
178. 5:53Sizing's very important and that's
179. 5:55something that you're going to learn as
180. 5:57you progress along your trading journey
181. 5:59as well, sizing these hands. So,
182. 6:02hope you guys enjoyed that rant. Hit the
183. 6:03like button. Comment below your
184. 6:05thoughts. Let's get into the hangover
185. 6:07setup, which is my bread and butter
186. 6:09setup for trading on the short side in
187. 6:12small cap land in small cap land. Now,
188. 6:15what I will say diving into this,
189. 6:18I mainly focus
190. 6:20backside shorts, which I call hangover,
191. 6:22the low-hanging fruit. Tickers that are
192. 6:24on not day one. So, when we say front
193. 6:27side and backside, what are we meaning?
194. 6:29Front side is essentially like this is a
195. 6:31day one mover and there's less edge.
196. 6:34There's less edge on the short side
197. 6:36front day mover. You know, it sometimes
198. 6:38there is some edge and you can take
199. 6:40smaller positions. I did that today with
200. 6:42the play.
201. 6:43But, the bread and butter, the higher
202. 6:44probability, I'm going to lean into a
203. 6:46little bit more and that's
204. 6:48this backside hangover approach, which
205. 6:50is day two. So, the psychology behind
206. 6:53that is what's important. In trading,
207. 6:55there's three types of analysis. You
208. 6:56have fundamental analysis, trader
209. 6:58analysis, and technical analysis. Now,
210. 7:00they're all important for different
211. 7:01reasons. We don't want to lean so
212. 7:02heavily into one over the others.
213. 7:05Uh but, when we say
214. 7:07trader analysis, I'm thinking, "Okay,
215. 7:08who's stuck in this trade and where?"
216. 7:10That's so important, psychology. Who's
217. 7:13stuck in this trade
218. 7:14and where? So, often times I'm
219. 7:16identifying the tickers that were the
220. 7:18largest percent gainers the day before
221. 7:20or maybe last week. And then, attention
222. 7:24typically is going to focus elsewhere
223. 7:26and what I do is I like to
224. 7:28revisit the biggest percent gainers and
225. 7:31short those down when there's not a lot
226. 7:34of volume on them. So, they get a lot of
227. 7:36volume, abnormal volume. You can see
228. 7:38this AG Silver, for example.
229. 7:41They get a lot of volume one day, they
230. 7:43push high,
231. 7:44and then the next day they just kind of
232. 7:46open up quiet, not a lot of volume. We
233. 7:48have predetermined levels of risk, which
234. 7:50creates good RR, that's what I like,
235. 7:53risk reward.
236. 7:54Uh and then you can short them with
237. 7:56clear risk over over the previous high
238. 7:58of day.
239. 7:59Uh and then again, the risk reward's
240. 8:01great. Could be like the risk is a one
241. 8:04versus a four reward on these. So then I
242. 8:06have so many examples of this trade. Uh
243. 8:10hundreds, hundreds of examples. We're
244. 8:11going to go through a few of them.
245. 8:13But essentially, what we're looking for
246. 8:14is
247. 8:15Look at this. In small cap land, AIRE,
248. 8:18random just like red to green move out
249. 8:19of nowhere. You'd have to predict that,
250. 8:21the volume just coming in out of
251. 8:23nowhere. And again, I'm more focused on
252. 8:25reacting. I'm trading more in a
253. 8:27reactionary way versus trying to predict
254. 8:30where volume is. Let's react to what is
255. 8:32happening is objective. So AIRE, out of
256. 8:36nowhere, spiking up like that. And the
257. 8:38next day, we can come in 320 short
258. 8:41against previous close, yellow line
259. 8:42here, 358. Or you could you could lower
260. 8:45your size and risk previous high of day
261. 8:47if you want some more flexibility. And
262. 8:49you can even size it. You can size it
263. 8:51like in thirds to
264. 8:53allow for some flexibility as well.
265. 8:55But oftentimes, this is going to be the
266. 8:56net result where you're going to see
267. 8:58profit taking because what happens is
268. 9:00look at the abnormal volume. So
269. 9:03it's so easy to find these plays too,
270. 9:04traders. You I mean, you don't need an
271. 9:06expensive scanner. You just need to say,
272. 9:07"Okay, what what is up over the last 5
273. 9:10days, 10 days?"
274. 9:11Look at those tickers. Are they sitting
275. 9:13there? Are they quiet? Did they get a
276. 9:15huge move and now they're not doing much
277. 9:17of anything? And they're sitting below
278. 9:19key levels? Well, we have key risk
279. 9:21areas. We can short them all down. It
280. 9:23just creates such a beautiful trade. You
281. 9:26don't have to think you're not ever
282. 9:27really going into a paralysis by
283. 9:29analysis because you have clear levels.
284. 9:32You can get in, set the levels, don't
285. 9:33adjust them mid trade, that's That's
286. 9:35amateurs do.
287. 9:36But it creates a really nice clean
288. 9:39trade. If it doesn't And what's
289. 9:40beautiful, too, is this trade is either
290. 9:42right or right out. You're right or
291. 9:44right out. I mean, it's it works really
292. 9:46or it doesn't. You see profit taking
293. 9:49or you just like this one, for example,
294. 9:51too, AUR.
295. 9:53Lot of volume day before, abnormal. Keep
296. 9:55that in mind. Opens up below some key
297. 9:58levels and it just doesn't have the same
298. 9:59level of volume and it profit takes down
299. 10:01a lot. I mean, you'll see this very
300. 10:03often. Now, they come in many different
301. 10:06shapes and sizes,
302. 10:08but they're all relatively similar where
303. 10:10you get a big percent move the day
304. 10:11before. It opens up below key levels. I
305. 10:14like to risk either previous high day or
306. 10:16previous close. I like to see it quiet
307. 10:19after hours and pre-market. So, there's
308. 10:21a few
309. 10:22criteria to it.
310. 10:24Criteria A, I want to see a large
311. 10:26percent move the day before. Criteria B,
312. 10:29I want to see a lot of inactivity in
313. 10:31pre-market after hours.
314. 10:34Uh C, I want to see it open up below the
315. 10:36previous high and previous close. So,
316. 10:40why is that important? Well, you got to
317. 10:41imagine the longs before to the the
318. 10:44current day are thinking, "Man, we're
319. 10:46not getting any follow-through momentum
320. 10:49on this ticker."
321. 10:50So, what what are you going to do,
322. 10:51trader? Think think if you're a long in
323. 10:53this play.
324. 10:54Near near high a day and it opens up
325. 10:57with absolutely no volume in on it. What
326. 10:59are you going to do as a trader on the
327. 11:00long side and you're in this and you
328. 11:02look at that? You're going to say, "Wow,
329. 11:04I mean, I better take profits before
330. 11:05everybody else does." And that's often
331. 11:07what happens. Everybody takes profit at
332. 11:09the same time and you get this flush and
333. 11:12shorts coming in, too. So, longs taking
334. 11:14profit, shorts jumping in, clear risk
335. 11:16levels creates an easy easy setup,
336. 11:19low-hanging fruit. Again, it's not like
337. 11:21this is a great edge. These are what I'm
338. 11:23trying to identify day up, but it's not
339. 11:25the largest percent gainer on the day.
340. 11:27There's less edge for me on the on day
341. 11:29one moves front side.
342. 11:31So, I the I have a higher edge, higher
343. 11:34expected value EV on these. So, I'm
344. 11:37tending to lean more into these names
345. 11:39versus if I'm going to trade like a
346. 11:41leading gapper on the day where it's
347. 11:42going to be overcrowded, it's going to
348. 11:44be more manipulated, there's going to be
349. 11:46less edge, which inherently creates more
350. 11:48risk. So, I still may take the trade,
351. 11:50but it's just going to be
352. 11:52uh smaller share size. But, you can see
353. 11:54how this works on many different
354. 11:56tickers. I'll flip through some examples
355. 11:58of this.
356. 12:00As I have uh a tons and tons of examples
357. 12:02of this setup. But, this is my favorite
358. 12:04short strategy on uh in small I mean, it
359. 12:07works really mid caps, large caps, too.
360. 12:10But, in small caps certainly because
361. 12:11small caps, like I said earlier,
362. 12:13these companies need money. So,
363. 12:15oftentimes they're like the offering is
364. 12:17just inevitable anyways. It's sitting
365. 12:19there. So, being involved a little bit
366. 12:22just for that offering to come out
367. 12:24oftentimes is going to pay out. But,
368. 12:26again, just make sure you're following
369. 12:28those four points I made earlier where
370. 12:30you're going to be disciplined to trade
371. 12:32trade this and not not overstay your
372. 12:35welcome. If it's not working, you're
373. 12:36right or right out. You have the risk
374. 12:38management to protect yourself. You size
375. 12:40it accordingly.
376. 12:41Uh and you just just repeat that process
377. 12:44through consistency to compound it over
378. 12:46and over again. You're not looking to
379. 12:48get rich quick. What you're looking for
380. 12:49is consistency via an edge to trade over
381. 12:52and over and over again. UCL, this was
382. 12:54beautiful.
383. 12:55Beautiful move into the close. It was
384. 12:58sitting there stagnant, opened up weak,
385. 13:00and just immediate profit taking.
386. 13:02I mean, we see this over and over again.
387. 13:04Here's X,
388. 13:06uh which is
389. 13:09a steel company. And uh again, so it
390. 13:12works not just in small caps, but
391. 13:14certainly I've seen it time and time
392. 13:17again in small caps. But, there's
393. 13:19certain variations to it. Here's a
394. 13:20ticker that did get a little morning
395. 13:22spike before it start profit taking. So,
396. 13:25you can even uh give it a little bit
397. 13:26more a little bit more wiggle room if
398. 13:28you want to size small and do like a uh
399. 13:31slow scale into them, but just make sure
400. 13:33you apply a dollar amount of risk
401. 13:36that you're comfortable with and you
402. 13:38stick to it. But, this has worked so
403. 13:40well. Um APLD, wow. And I mean, I love
404. 13:43revisiting a lot of these tickers and
405. 13:45just I've screenshot of them over all
406. 13:47the years cuz I've just seen how well it
407. 13:49works.
408. 13:51And this is uh my bread and butter. This
409. 13:52is what I love to trade, traders. Uh
410. 13:54these low-hanging fruit, I call them the
411. 13:56hangovers. Uh but traders, if there are
412. 13:58any questions at all, post them in the
413. 14:00comments below. Let us know what you
414. 14:02think. I'm always happy to help you guys
415. 14:03out. I'm a small-cap analyst over at
416. 14:05Trade the Pool.
417. 14:06Uh but yeah, let us know, traders. I
418. 14:08appreciate you guys staying
419. 14:10uh through this video, watching this
420. 14:12video. Let us know if you have any
421. 14:13questions, need any help, throw them
422. 14:14down. Always happy to. Otherwise,
423. 14:16traders, happy trading. We'll see you
424. 14:18guys next time.
425. 14:19All right.
426. 14:22>> [music]