Day Trading Short Selling Strategy

Day Trading Short Selling Strategy: Shorting Intraday Stocks

This article shows you how to short retail investors’ favorite stocks. Is it possible to make money shorting stocks? It is, albeit it’s very difficult. In the context of a bear market, where stock prices can rapidly decline and volatility increases, short selling strategies become particularly relevant in the stock market. In this article, we present you a day trade stock trading strategy (short strategy) for stocks that have the following conclusions:

The win rate is 65%, CAGR is 99%, and the average gain per trade is 1.83.

Keep reading, and we’ll show the trading rules (or jump straight to the trading rules or the backtest):

Understanding short selling

First, a few words about short selling:

Short selling occurs when traders anticipate buying back the stock at a lower price, aiming to profit from the difference in stock price movements.

Statistics and facts show that most stocks perform poorly. Despite this, it’s very difficult to make money shorting stocks because engaging in a short sale requires a margin account, which is necessary to borrow shares to sell them short.

Over time, the vast market capitalization goes up due to inflation and productivity gains.

When you are short, or more precisely, when you hold a short position, you have the odds against you. To make it even more difficult, you must factor in costs and interest rates to borrow the stocks you want to short. Additionally, when using a margin account for a short sale, traders need to pay interest on the value of the borrowed shares for as long as the short position is open.

Short sellers, individuals who participate in short selling, play a significant role in the market by potentially indicating overvalued stocks, but they also face the risks of short selling, including the potential for unlimited losses, especially in scenarios like a short squeeze where the price of the stock can rise significantly and rapidly. Please also have a look at our short squeeze trading strategy.

It’s crucial to distinguish this legal practice from naked short selling, which involves selling shares that the investor has not borrowed or obtained, an illegal practice due to its potential to manipulate the market and harm other traders.

Understanding retail investors’ favorite stock trading

The strategy is based on market sentiment. When the market sentiment is very bullish, we short the stocks. In other words, we short the most popular stocks among retail investors.

We will use Nasdaq’s retail trading activity tracker database to define and quantify retail investors’ favorite stocks.

The Nasdaq publishes daily the most traded stocks by retail investors. It covers over 9,500 US-traded stocks, ADRs, and ETPs.

You can find the data here:

Although you must pay to access the full database, you can get the top 10 stocks going back 4 years for free. That is what we are going to use for this backtest.

Shorting Retail Investors’ Favorite Stocks – Trading rules

Using the data from Nasdaq, the strategy is straightforward. These are the trading rules (members can unlock the trading rules and get trading rules for hundreds of trading strategies):


Sentiment, on the other hand, is a “score derived from the retail net flows (buy-sell) of the most recent 10 trading days. This field has a value that ranges from +100 to -100, whereby the more positive (negative) the score, the greater the proportion of recent retail net buying (selling)”.

The database of stock prices we used has a survivorship bias and is not adjusted for dividends.

Shorting Retail Investors’ Favorite Stocks – Backtest and performance

Because we couldn’t access the whole database, we only picked stocks among the ten published stocks every day. We took a position in the stocks that fulfilled the trading rules mentioned above.

Here is the equity curve of the strategy over a period of 4 years:

Day Trade Stock Trading Strategy
Day Trade Stock Trading Strategy

The statistics and trading performance are impressive:

  • CAGR is an impressive 99%.
  • Win rate is 65.26%.
  • Average return is 1.83%
  • Max drawdown is -48.33%

The statistics and trading performance are impressive, reflecting the effectiveness of the short selling trading strategy, which relies on predicting declines in the stock’s price to buy back at a lower price for profit.

However, this strategy’s performance can be significantly impacted by a short squeeze, a rapid increase in a stock’s price that forces short sellers to cover their positions at any price, potentially leading to exponential losses. Short selling involves unlimited risk! A stock can only fall 100%, but it can rise multiples of that percentage. The risk and reward is asymmetric.

Also keep in mind that this backtest covers only a period of 4 years, which is relatively short.

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