Going against the grain of the financial system

Over the past year or so Eoin Treacy has made many correct market calls in his Exponential Investor Premium videos.

He predicted the sudden drop in bitcoin a couple of weeks ago, which caught so many people of guard.

He called the decline in the big tech mega caps way before it happened.

And he even called bitcoin’s monster run-up last year when futures were introduced – and subsequent crash.

If you’re familiar with Eoin’s background, calls like this may come as no surprise. He is a world-renowned trader.

People always say that if you’re a decent trader, you don’t care if markets “are going up, down or sideways” because you are making just as much money.

The reason for this is because, unlike most mainstream investors, traders learn how to “short” stocks – make money when prices fall.

And given that so many of Eoin’s correct calls are about falling stocks, I suppose it was inevitable he would one day show investors how they can make money from these calls, too.

With that in mind, he’s producing a webcast on Wednesday afternoon to teach people when, how and why they should short.

Personally, I don’t know a lot about shorting – or anything at all, if I’m honest – so given Eoin’s expertise in this, I wanted to ask him how it all works. And why anyone would do it.

I asked him a series of ten questions over email, and now I’m going to share his answers with you, too.

There is a massive amount of investment wisdom in these answers. I think it would do anyone well to read them – even if you don’t ever intend to short yourself.

I especially liked his answer to question 2:

“The entire financial system is set up to sell us shares so if we adopt a shorting strategy we are going against the grain of the financial system,” he says. But I’ll let you read it in full for yourself.

Below you can find his answers to my ten shorting questions.

And if you’d like to find out more about Eoin’s shorting strategy, you can watch his free webcast at 2pm on Wednesday. So long as you secure your free priority viewing pass here.

1. Why are you going public with this strategy?

Buying breakouts like we do in Trigger Point Trader is an unleveraged strategy but it is only half the story. In just the same way that we can buy breakouts we can sell breakdowns. By deploying a shorting strategy we are opening up double the number of potential trades. I think it is a way to offer a more complete suite of products to subscribers.

2. Why do you think shorting is less popular than going long for the average investor?

Shorting is inherently contrarian. The entire financial system is set up to sell us shares so if we adopt a shorting strategy we are going against the grain of the financial system. That’s not for everyone.

Shorting is also necessarily leveraged because it implies one is borrowing shares to sell. That added source of risk is something a number of people are uncomfortable with.

There is also an illusion that short sellers profit at other people’s misery. I don’t put much stock in that argument because there is a seller for every buyer and vice versa and when prices rise short sellers lose money.

3. What is the main benefit to learning to short, and is it a tool you believe every investor should have in their box?

Learning to appreciate the money-making potential from falling prices makes us more alert to the potential prices can fall as well as rise.

That’s important because for most investors selling is a lot harder than buying especially when an investment has been doing well. If we learn to short, we can then come to a better answer of whether prices are more likely to rise or fall.

4. By learning to short can you make money during market crashes – ie, 2008?

By shorting it is possible to make money from market crashes but they do not happen all that often. However, markets fall a lot faster than they rise and we have tons of examples of shares that fall aggressively just as if the market were crashing because it is for that one individual shares.

5. Could these shorting techniques work in crypto markets?

The brief answer is yes but it’s not that easy.

The volatility is such that one needs to post a lot of margin to short bitcoin and that locks up capital for other potentially lucrative trades.

There is no doubt that bitcoin and other assets conform to the sell signals I use, but identifying potential and actioning the trade are two different but necessary components to any successful strategy.

6. Isn’t shorting usually only done by hedge funds and day traders? Can an average investor really get a handle on how to short well?

I would never council anyone to day trade, it’s just too hard to make money.

Hedge funds on the other hand, most often short to hedge their long exposure. There are of course funds that do it the other way around. They go short and go long of shares to hedge their negative exposure.

Rather than get caught up in what other people do, let’s not overcomplicate things. Before major declines we regularly see a group of characteristics fall into place, which tells us it is time to exit if we are long and to initiate shorts if we are disposed to do so. It’s that simple.

7. Do you need any kind of special software or trading accounts to follow this strategy?

A spread-betting account is all that is required. No software is needed. Since spread betting is a betting on the movement of prices, it does not matter whether one is betting the price will rise or fall.

8. Why is now a good time for taking the short side, in your view?

Volatility has been increasing.

That’s good news for this kind of strategy because it means there is more variability in the performance of different shares. There are no clear winners and losers whereas in 2017 there were only winners so a shorting strategy just would not have worked.

If you think about all the events going on in the world today, whether it is Brexit, the trade war, Italy’s populist government, China slowing down, emerging markets getting beaten up, mega-cap tech falling aggressively but corporate profits are record highs, unemployment close to record lows, still low interest rates and low oil prices, then we can see there is a lot of disagreement about what to expect next.

That is going to contribute to some assets doing extraordinarily well and others doing very poorly.

9. How can readers find out how to get started with your shorting strategy?

I’ll be doing a special webcast on Wednesday afternoon at 2pm. It’s free to watch for Exponential Investor readers, and in it I will show you exactly how my technique works.

All you need to do is click here to secure your priority viewing pass.

10. When does it go live?

On Wednesday at 2pm.

In the meantime, I have prepared a series of free videos to get you started. You can watch them here.


I hope you enjoyed learning about Eoin’s take on shorting the markets.

As I said, there is a lot of investment wisdom contained in his answers, and I’m sure he’ll be dispensing a lot more of it on Wednesday.

Until next time,

Harry Hamburg
Editor, Exponential Investor

Category: Cryptocurrency

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