Understanding the Short Scanner
A complete guide for beginners - no investment background required
Table of Contents
1. What is Short Selling?
The Basic Concept
Normally, when you invest in a stock, you buy low and sell high. You purchase shares hoping the price will go up, then sell them for a profit.
Short selling flips this around: you sell high first, then buy low later. You're betting that a stock's price will go down instead of up.
Real-World Analogy
Imagine you borrow your neighbor's lawnmower (worth $500) and immediately sell it to someone else. A month later, the same lawnmower model is on sale for $400. You buy one, return it to your neighbor, and pocket the $100 difference.
That's essentially short selling - you're borrowing something, selling it at today's price, and hoping to buy it back cheaper later.
How It Works in Stocks
- Borrow shares from a broker (this happens automatically)
- Sell the borrowed shares at the current market price
- Wait for the stock price to fall
- Buy back the shares at the lower price
- Return the shares to the broker and keep the profit
Example Trade
Important: Short Selling Has Higher Risk
When you buy a stock normally, the worst that can happen is it goes to $0 (you lose 100%). But with short selling, there's no limit to how high a stock can go - your potential losses are unlimited.
If you short a stock at $100 and it rises to $200, you've lost 100%. If it goes to $300, you've lost 200% of your original position. This is why risk management is crucial.
2. How This Scanner Works
The Goal
This scanner looks for stocks that appear overextended - meaning they've risen too fast, too quickly, and may be due for a pullback. Think of it like a rubber band stretched too far; eventually, it snaps back.
What We Scan
The scanner analyzes approximately 100 technology stocks including major companies like Apple, Microsoft, NVIDIA, and many others. We focus on tech because:
- Tech stocks tend to be more volatile (move up and down more)
- They often have speculative run-ups that correct
- High trading volume means easy entry and exit
The Scoring System
Each stock receives a Short Suitability Score from 0 to 100. Higher scores indicate stocks that look more overextended and potentially ready to decline. The score is calculated from four factors:
Measures if a stock is overbought. RSI above 70 suggests the stock has risen too fast.
How much the stock has risen in the past month. Rapid gains often lead to pullbacks.
Unusually high trading volume can indicate a climax in buying (everyone who wanted to buy already has).
Where the stock closed relative to its daily range. Closing near the low suggests selling pressure.
3. Understanding Signal Strength
Based on the score, each stock is assigned a signal strength:
Very rare. Multiple indicators align showing severe overextension. The system will automatically open a position.
Good shorting opportunity. Several indicators suggest the stock is overextended. The system will automatically open a position.
Some signs of overextension but not conclusive. No automatic position - just watchlist material.
Early signs that might develop into something stronger. Monitor for changes.
No significant shorting opportunity detected. The stock appears fairly valued or bullish.
Automatic Position Opening
The system only opens virtual short positions for Strong and EXTREME signals. This ensures we're only acting on high-conviction opportunities.
4. Technical Indicators Explained
RSI (Relative Strength Index)
Oversold
Neutral
Overbought
RSI measures the speed and magnitude of recent price changes on a scale of 0-100.
- Above 70: The stock is "overbought" - it may have risen too fast
- Above 80: Strongly overbought - higher chance of pullback
- Above 90: Extremely overbought - rare and often precedes corrections
We use a 14-day RSI, which is the industry standard timeframe.
1-Month Price Change
This measures the percentage change in stock price over the last ~22 trading days (one month).
- 0-20% gain: Normal market movement
- 20-40% gain: Strong rally, starting to look extended
- 40%+ gain: Parabolic move, often unsustainable
Stocks that rise too quickly often "mean revert" - they pull back toward more normal levels.
Volume Ratio
Compares today's trading volume to the 20-day average volume.
- 1.0: Normal volume
- 2.0: Double normal volume - increased interest
- 3.0+: Very high volume - often indicates a climax
When a stock makes new highs on extremely high volume, it can signal that everyone who wants to buy has already bought - a potential top.
Close Position
Where the stock closed within its daily trading range (high to low).
- Near the high: Buyers in control - bullish
- Near the low: Sellers took over - bearish
A stock that rallies during the day but closes near its low shows that sellers stepped in - a potential warning sign.
5. Risk Management Features
Since short selling has unlimited risk potential, this system has multiple safeguards:
Stop Loss (15%)
If a shorted stock rises 15% above our entry price, the position is automatically closed. This limits the maximum loss on any single trade to 15%.
Why 15%? It's wide enough to avoid being stopped out by normal volatility, but tight enough to prevent catastrophic losses.
Trailing Stop (5%)
Once a position reaches 10% profit, a trailing stop activates. This stop "trails" 5% behind the lowest price achieved.
Example of Trailing Stop in Action
| Day | Stock Price | Profit | Trailing Stop | Status |
|---|---|---|---|---|
| Entry | $100.00 | 0% | - | Waiting |
| Day 3 | $92.00 | +8% | - | Waiting |
| Day 5 | $90.00 | +10% | $94.50 | ACTIVATED |
| Day 7 | $85.00 | +15% | $89.25 | Trailing |
| Day 9 | $80.00 | +20% | $84.00 | Trailing |
| Day 11 | $84.50 | +15.5% | $84.00 | CLOSED |
The trailing stop locked in a 15.5% gain instead of letting the position reverse to a smaller profit or loss.
Maximum Positions (10)
The system limits total open positions to 10. This ensures:
- Diversification across multiple stocks
- No single position dominates the portfolio
- Risk is spread even if several positions go against us
6. Market Regime Detection
The overall market environment greatly affects individual stock performance. Shorting stocks in a strong bull market is like swimming against a powerful current - possible, but much harder.
How We Detect Market Regime
We track QQQ (an ETF that tracks the NASDAQ-100, heavily weighted toward tech stocks) over the past 20 trading days:
New short positions are PAUSED. Existing positions continue to be managed normally.
Caution advised, but shorts allowed. Market has upward momentum.
Normal market conditions. Shorts operate normally.
Favorable conditions for shorting. Market has downward momentum.
Why This Matters
During strong bull markets, even overextended stocks often keep rising. The "greater fool" theory takes over - people buy not because the price is fair, but because they expect someone else to pay even more. Fighting this trend leads to losses.
7. Earnings Calendar Protection
What Are Earnings?
Every publicly traded company must report their financial results (revenue, profits, etc.) every quarter - roughly every 3 months. These reports often cause dramatic stock price movements.
The Earnings Risk
Stocks can jump 10-30% (or more) overnight after an earnings report - either up or down. This creates a problem for short sellers:
- If earnings beat expectations, the stock might gap up past your stop loss
- You could lose much more than your planned 15% maximum
- The move happens overnight when markets are closed - you can't react
Real Example
You short a stock at $100 with a stop loss at $115. The company reports amazing earnings after market close. The stock opens the next day at $140. Your stop loss didn't protect you because the stock never traded at $115 - it jumped directly from $100 to $140.
Result: 40% loss instead of the planned 15% maximum.
Our Protection
The system checks each stock's earnings calendar and will not open new positions within 7 days of an earnings announcement. This blackout period protects against:
- Pre-earnings speculation and run-ups
- The earnings announcement itself
- Post-earnings volatility
Existing positions are still managed normally - only new positions are blocked during the blackout period.
8. Reading the Dashboard
Stats Cards
Number of currently active short positions (max 10)
Total profit/loss of all open positions if closed right now. "Unrealized" means you haven't locked it in yet.
Number of positions that have been closed (wins + losses)
Percentage of closed trades that were profitable
Cumulative profit/loss from all closed trades. "Realized" means these gains/losses are locked in.
Average duration of closed trades
Positions Table
The price at which the short position was opened
The stock's current price
The lowest price the stock has reached (best point for a short)
The price at which the position will be automatically closed (either the original stop loss or the trailing stop)
Current profit or loss percentage. Green = profit, Red = loss
"ACTIVE" means the trailing stop is engaged (position has hit 10% profit). "Waiting" means still using the original stop loss.
9. Glossary of Terms
- Bear Market
- A market where prices are falling. Good for short sellers.
- Bull Market
- A market where prices are rising. Challenging for short sellers.
- Entry Price
- The price at which a position was opened.
- Exit Price
- The price at which a position was closed.
- Gap
- When a stock opens at a significantly different price than its previous close, skipping over prices in between.
- Long Position
- A traditional investment where you buy a stock hoping it goes up.
- Mean Reversion
- The theory that prices tend to return to their average over time. Extreme moves often reverse.
- Overbought
- A stock that has risen too quickly and may be due for a pullback.
- P&L (Profit and Loss)
- The gain or loss on a position or portfolio.
- Position
- An active trade - either a stock you own (long) or one you've shorted (short).
- Pullback
- A temporary decline in a stock's price after a rally.
- Realized P&L
- Profit or loss that has been locked in by closing a position.
- RSI (Relative Strength Index)
- A momentum indicator measuring the speed of price changes. Scale of 0-100.
- Short Position / Short Selling
- Selling borrowed shares with the intent to buy them back at a lower price.
- Stop Loss
- A predetermined price at which a position is automatically closed to limit losses.
- Trailing Stop
- A stop loss that moves with the price, locking in profits as they grow.
- Unrealized P&L
- Profit or loss on open positions that hasn't been locked in yet.
- Volatility
- How much a stock's price moves up and down. High volatility = big swings.
- Volume
- The number of shares traded in a given period.
Important Disclaimer
This is a virtual trading system for educational and research purposes only. No real money is involved.
Short selling involves substantial risk and is not suitable for all investors. Past performance does not guarantee future results. This system is not financial advice.
If you decide to trade with real money in the future, please consult with a qualified financial advisor and thoroughly understand the risks involved.