A systematic approach to profiting from declining stocks by identifying and shorting securities showing the weakest technical characteristics.
This page explains our short weakness strategy framework. You'll learn about the scoring system that identifies weak stocks, the optimized parameters for position sizing and risk management, how trades are executed, and why certain price ranges work best for shorting.
The short weakness strategy identifies stocks exhibiting bearish characteristics and profits when their prices decline. Unlike the long strategy which buys strength, this strategy sells weakness — shorting stocks with poor momentum, bearish technical patterns, and underperformance relative to the market.
Through extensive optimization testing over 28,000+ parameter combinations, we discovered that the $40-$150 price range produces dramatically better risk-adjusted returns than wider ranges. This isn't arbitrary — there are fundamental reasons why.
While the strategy allows up to 20 positions, the restrictive filters mean we typically hold only 4-5 stocks. This isn't a limitation — it's a feature. The filters ensure we only short the highest-conviction opportunities.
Each stock receives a weakness score from 0-100 based on seven bearish factors. Higher scores indicate weaker stocks that are better short candidates. The factors are weighted based on extensive optimization to maximize risk-adjusted returns.
Frequency of bearish candlestick patterns (red candles, dojis at resistance)
How far the stock has fallen from recent highs (larger drops = higher score)
Volume on down days vs up days (selling pressure indicator)
Underperformance vs the broader market (SPY)
Trend consistency showing successive lower lows
Recent price decline across multiple timeframes
Price below key moving averages in bearish alignment
The weights were determined through optimization testing that maximized the Calmar ratio (annualized return divided by max drawdown). Interestingly, candlestick patterns and distance from highs proved most predictive, while traditional momentum factors like MA alignment had less impact.
Key Insight: Stocks that have already fallen significantly from highs and show consistent bearish candle patterns tend to continue declining. This "weakness begets weakness" phenomenon is the foundation of our strategy.
Short positions have theoretically unlimited risk since stock prices can rise indefinitely. Our 30% stop-loss limits losses on any single position and is executed immediately when triggered (not next-day) to protect capital.
We tested next-day stop-loss execution for consistency with signal execution, but results were dramatically worse:
Delaying stop-loss execution allows positions to rally further, causing bigger losses. Protective stops must be immediate.
Short selling carries unique risks beyond traditional investing. Losses are theoretically unlimited, you may be forced to cover at unfavorable prices during short squeezes, and borrowing costs can erode profits. This strategy is for experienced traders who understand these risks. Past backtested performance does not guarantee future results.
Stock is currently shorted and remains weak. The position is maintained at current size (no rebalancing in this strategy).
Stock is not currently shorted but has entered top weakness rankings. A new short position will be opened at next day's open.
Stock is currently shorted but no longer qualifies (score dropped or price moved outside range). Position will be covered at next day's open.
After market close, we calculate weakness scores for all stocks. Stocks meeting criteria (score ≥70, price $40-$150) are ranked. We identify which positions to keep, which new shorts to enter, and which to cover.
At market open, we execute the signals from the previous day. Covers are executed first to free up capital, then new shorts are opened. This ensures realistic backtesting without look-ahead bias.
If any position rallies 30% above entry during the day, it is covered immediately at the current price. This is protective and happens same-day, not next-day.
All performance figures are based on historical backtesting and are hypothetical. Past performance does not guarantee future results. The backtest assumes perfect execution at open prices, no borrowing costs for shorts, and no slippage. Real-world trading will differ. Short selling involves significant risks including unlimited potential losses. This is not investment advice.