The short answer is long. The long answer why not to trade trends by shorting is twofold. For one, shorting has at its best an upside potential of 100%. Secondly, and induced by this limitation, downmoves often are more zigzagging than upmoves. A trend should be smooth, otherwise the risk of getting stopped out increases. There are two ways to overcome this limitation and to trade also short trends.
Both have their problems. Method number one is to simply sell something short that doesn’t move that strong and is less volatile but increase the leverage by using margin. Futures trading ever worked this way and riding a trend up and down is in that market very comparable. Up- and downtrends have similar characteristics, because the final limit of zero is far away for, e.g., a slowly moving copper contract. That also suppresses the tendency to swing as the stock market often does in downtrends.
Another way of using leverage that is also suitable for the stock market would be to trade options, in this case puts, instead of stocks themselves. Both methods, trading futures and options, have different money management characteristics than trading the original.
There is not only some leverage that amplifies gains and losses so that trading smaller movements also make sense. No, the bad boy of options and futures trading is the fact that gains and losses are of the same size on an absolute scale. That means, percentagewise are losses bigger than gains and that is the dark secret of the leveraged financial instruments. The trading result of this secret will be discussed later and in more depth on the Penny Stock Alerts site, but the short message is sad enough. Only few will win big and the many go into the poorhouse.
Perhaps the more effective way to trade short in the stock market is the use of the many inverse ETFs that are around since some years. An ETF can’t go below zero as a futures account can. Instead, it can more than double in price.
But there is also a caveat. To be able to make such an inverse trading vehicle possible, it is necessary to readjust the underlying assets each night. Otherwise it couldn’t advance more than 100%. This readjustment will cause an erosion of the short ETF value, just by a fluctuating market of the underlying instrument. For longterm holders, aka investors, there is an automatic devaluator built in – not the thing investors like. Trend traders are of course also effected.
Essentially the trading message is clear. It pays off to concentrate on long trades, investments that really can double, triple or become the famous ten-baggers of Wall Street legend Peter Lynch. Trading downtrends with inverse ETFs is more for shorter trends.