I was reading Zerodha varsity technical analysis module and there I developed one doubt related to the Bearish marubuzo(or a sell order in general).
The instructor says, “We can short on a weak day ie a red candle day, if the marubuzo is bearish, it suggests us to short, so we will put the high of the candle as the stoploss”.
This is not just with bearish marubuzo, he almost everywhere puts the high of the red candle as the stoploss.
My doubt is, If I bought one share at rs 1000, now it is 1400, and the day is a red candle day, so why would I stop it from going even up by putting stop-loss at the high of that day? Also, I don’t understand why anyone would place a target lower to the current market price ? If I want to sell, I will sell at the current market price, so no point of placing target lower to current market price. I don’t understand the significance of stoploss and target price in terms of a red candle day(or when we want to short).
Anyone kind enough to help me up with this ?
Pankaj, When you short a stock, you are trying to benefit from stocks price going down, if it goes up you will make a loss, that’s why Stop-Loss is at higher price and target at lower price.
Thanks and Sorry, I still don’t get it. Say if I bought a stock at 1000, now it is at 1400(plus it is a red candle day and I want to sell it), why would I stop the stock go up, say I put the stoploss at 1425(high of candle), it will stop the stock from going up, say it went till 1500, why would I stop it going to 1500? Also, I don’t see any point putting target price below 1400(target at say 1350). The profit would be less in that case in comparision to current market price, no ? (400 with current market price, 350 if I put target at 1350). I think I am missing something. Please help.
Just like when you Buy a stock, you benefit from price going up, when you short a stock you can benefit from price going down, this concept is used specially by Intraday traders or F&O traders.
Read this chapter for more details.
Okay. So it is like, we don’t hold the stock, so we sell it at a price, expecting it to go down, and then buy it at a cheaper price, making the difference as our profit(am i right?).
Now you got it.
Keep in mind though in Equities you can to shorting only on Intraday basis, you can’t carry forward short positions overnight.
Thanks shubh for being so kind to answer all my questions
I just have only one doubt left. So the author in the module has given reference for short selling in the course, like we don’t have the stock but we sell it and then buy it later. But how would we sell in regular trades, like we actually hold a stock(say reliance @ 1700) from some days back and want to sell it? Now I don’t see a point of stoploss or target(or there is?). I think we simply sell the holding at the CMP. Am i right ? If I am wrong, how would you sell the stop you hold when you want to, take reliance from my example.
Thanks a lot in advance and have a great day ahead.
You can sell stock in your holdings as well if you think price is going to go down and buy it back later.