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Research mentioned in cxoadvisory.com blog suggests that short sellers are on average more informed than other traders, and high levels of short interest in a stock indicate poor future returns. The converse is also true, as the blog suggests that “Heavily traded stocks with low short interest generate statistically and economically significant positive abnormal future returns”.
If you identify a set of stocks that have low short interest, consider going long in the stocks, as a day trader or a swing trader. This idea provides a method of creating a list of stocks in which long positions should be taken.
How do we identify stocks in which there is low short position? In the USA, stocks are sold against borrowing of securities. There is data on the number of shares borrowed which enable traders to identify shares with large or small short positions. If readers have some idea of information on short positions retrieved from F&O data, please share it with all of us.
Sigamani says:
would like to know your comment regarding trading in nifty..I read somewhere, that a person has to have a mechanical trading system (something like a visual graph with some moving averages)and it should give calls automatically…irrespective of situations just go with the calls everytime and your probability of winning will get you profits..what do you say on a system above like this?
My Notes: In our office, we have computerised systems for trading the Nifty. Many times the systems are unable to determine the market environment and takes trades which seem obviously wrong, e.g. going short on last wednesday, (On Monday the market had hit the upper circuit and momentum was on the side of the bulls). But, thank to (a) discpiline, (b) probability, these systems make money over time. Similar methods can be adopted in visual chart analysis also.
Vicky asks:
Alan Farley has published an article about the crossovers of 200Ma and 50Ma as GOLDEN CROSS(50 crossing 200 from above)and DEATH CROSS(50 crossing 200 from below).In that view a GOLDEN CROSS is about to occur(or occured) in NIFTY. Can we take that as a positive signal?http://hardrightedge.com/wheel/hrecrossovers.htm
My Notes: Yes, such crossings indicate strength / weakness in the market. Are you planning to take day or momentum trades based on a Golden Cross on the daily chart? That will be unwise, since the crossover suggests a long term change in the trend, not a short term move. An intermediate trader can take a long position after the cross (ideally after a dip), and exit on a Death Cross .