3 Vital Rules in Short Selling Stock

Don't short the bad company in a down trend market.

There are so many crummy, awful companies out there but please remember this important rule: Don’t short the bad company in a down trend market. The reason is that company can be taken over by the big fish in down trend market.

Never short a stock because it seems like it's overvalued.

Don’t ever try to predict an irrational top of stock even you think they are bad stock. Because there will always be a mutual fund out there that will auto buy more to make higher tops. Example, Chipotle seemed expensive at one time and then grew its market cap substantially. Some biotech can even seem like they have no earnings, but then get a bid anyways. It doesn't matter if you think something is too expensive, don't short it.

Using Contrary Thinking When Short Selling.

If you hear a bunch of investors who are all shorting the same stocks you are shorting, that is bad news and you should cover immediately. Traders will abandon their shorts if things get tough and drive the price higher. There is too much risk of what can go wrong if you short a stock that everyone else is.