Momentum and trend are two of the most useful tools that a binary options trader can use, and that means that short term traders of all sorts should be evaluating these concepts before each trade that they make.
One simple way to figure this out with stocks is to look at the short percentage that has been taken out. If there is a large amount of short positions taken out, this indicates that large hedge funds have started moving against that company, and even if that company doesn’t have weak technical, it could move momentum downward, and this could reverse the trend of the stock’s price so that the stock starts dropping more steadily. Right now, with the way that the Dow Jones Industrial Average is dropping, looking at short percentages in some of the bigger companies is important. If a company has more than 1 percent of its shares being held short, there is suddenly cause for concern. If the number keeps rising, it is indicative of a growing problem with the stock, and this could lead to a major drop in price once the fundamentals begin dictating price again.
There are a handful of major companies that are seeing large rises in their short ratios. For example, Sprint has seen their shares held short go from 202.7 million to 213.6 million. Their short ratio was 11.10 in mid-December, and when you look at the ratio compared to their float, they are in even worse shape at 28.38 percent. This means that the company would instantly lose more than a quarter of its expendable float if the short positions proved to be profitable. That’s a scary predicament to be in for a company, and while it’s not likely that Sprint will go bankrupt in the near future, at just $3.10 a share at the time of this writing, this is not a strong place for Sprint to be. If the short positions become even more dominant when January information is revealed to the SEC, it’s possible that Sprint could drop even more in price.
This is an extreme example, but it is a good point to make because it shows just how important the influence is that short traders can have on an asset. Even if their positions are unfounded, the instability that selling a stock short can bring has the potential to drive prices down for extended periods of time. It’s called sentimental trading, and it can be a very profitable short term strategy, for any type of trader. Just remember, if the company is a strong one, with good leadership and a strong product line, that downward trend will not last indefinitely, and taking out positions that last for too long, such as month long or longer binary options trades, can be dangerous, simply because of the fact that a company’s true strength becomes more and more likely to shine through the longer the timeframe looked at becomes. There’s a time and a place for trades like this; this isn’t it.
On the other hand, General Electric saw its short interest drop by more than double digit percentages recently, indicating that even though the business economy is going through a rough period, GE is gaining traction, and this indicates that its share prices are getting ready to rebound, and may see particularly sharp growth once the market rights itself. GE went from 251.44 million shares short to just 159.27 million from November 2015 to December 2015. Traders and investors of all sorts should be watching for these trends, too, so that they do not get caught trying to ride a trend that has already come to an end.