Millionaire traders sell short and make money in down markets. The best traders make money going up and down. However selling short always gets a bad press and is supposedly unethical to many.

Nonsense! The market rules say you can go long and go short. Why would you not want to use all the tools at your disposal? What I don’t believe is ethical is shorting small cap companies. In my own trading, I don’t start shorting anything unless it has a market cap of at least £500 million. Of course by the time I look to get out of a short trade the market cap may be way lower.

It seems the public are conditioned just to buy and hold. That is fine when we are in a bull market, but we are not and I don’t see a bottom in sight. Whilst the financial world wants to get this bear market over as quickly as possible, you cannot force markets to repair themselves quickly – it takes time and in most cases years, not months.

Run for cover
Of course, when you short sell, at some stage you have to buy back and cover. As the price gets closer to zero, you have less and less meat on the bone. In the case of Barratt and Taylor Wimpey I have been covering shorts and taking profits.

In the last few weeks I have started building up a short position in Admiral Insurance (LSE:ADM) from around the £8.80 level. I see the general insurance markets becoming more and more competitive and also predict a trend of people selling second cars and trading down to minimium insurance.

Naturally, not all my short sells work out. Last year I was short on Carpetright and then, out of the blue, Lord Harris announced he was going to take the company private, causing me to be stopped out and take a £10,000 loss. In the end he never did go through with it and Carpetright has sunk since.

In other cases you may short sell a company only to see it continue to hold up, so you don’t make much or lose much. However sure you are that a share is going down you always need to have risk management – open a small trade and as it moves in your favour sell some more.

If shorting individual shares isn’t for you, short sell an index. I prefer the FTSE 250 to the FTSE 100 as a short sell. Anyone following my covered warrant trade last month on the FTSE 250 using SQ30 would be up over 55 per cent in less than a month.

Of course, nothing goes up or down in a straight line. At some stage we will see a sharp rally, which will give a false sense of a new bull market. Be sceptical: I don’t see any bottom in any major index until at least early 2009.

Avoid financials
The financial sector is often referred to as ‘cheap’. However, other than for a short term trading bounce, I would not invest a penny in financial shares.

How can many claim that financials such as Citibank, UBS, Barclays or Deutsche Bank are cheap when even the companies themselves cannot value their own assets? I know the banks I would like to own, but it is not the time to invest yet. Following their sub-prime woes, I still think banks have even worse financial problems to come, from personal and commercial lending.

One final word on short selling: use a stop if you are trading via a spread bet – even the best researched short trade can continue to go up. Also, using a covered warrant put is the safest way to go short. Your worst case scenario is that the warrant expires at zero and you cannot be stopped out.

Vince Stanzione has produced a home-study course to teach private investors how to benefit from trading financial spread bets and fixed odds, priced at £347. For more details, visit www.fintrader.net or call 01189 476630.