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This book is intended as a follow-up and updated “second edition” of the book I originally ghost-wrote in 2004, How to Make Money Selling Stocks Short by William J. O'Neil with Gil Morales (John Wiley & Sons, October 2004). While that book has been a strong seller and does a reasonable job of outlining the basic concepts behind the art of short-selling, it is woefully inadequate in terms of its coverage of the basic mechanics of short-selling at the granular level. In that book, we relied entirely on weekly charts, and while weekly charts most certainly have their purpose in helping to identify the macro-patterns that develop in short-sale candidate stocks, it is on the daily chart that we determine the precise point within a stock's pattern at which to sell it short. Thus, the fact that the 2004 short-selling book did not contain any daily charts meant that it essentially ignored the most important aspects of short-selling. What is radically different about this book is that it relies mostly on daily charts and gives readers a much more detailed and realistic view of just how the short-selling process can play out. This is the essential difference between this book and the last, and one which I believe makes a huge difference in terms of conveying a true sense and understanding of how short-selling works at the point of impact (e.g., the precise point or points at which the short-sale trade can be executed). This can only be seen on the daily chart.

In this book, we update and modify what I see as a fluid, evolving set of short-selling principles rather than a static, dogmatic one. In the process, some of the old short-selling “golden rules” described in both How to Make Money Selling Stocks Short and Chapter 6 of the first book that I wrote with my friend and colleague Chris Kacher, Trade Like an O'Neil Disciple: How We Made 18,000 % in the Stock Market (John Wiley & Sons, 2010), have been exposed as myths. One major myth about short-selling is that one can only short stocks during a bear market. That is simply not true, and the objective material in this book more than blows that premise out of the water. So it is that as I continue to trade on the short side of the market and gain more experience, my objective research and post-analysis of my own short-sale trading as a matter of course reveals more sides to the multifaceted diamond that short-selling, when done right, can be.

One of the major new developments in my work and research on the short side is the use of “fractal” short-selling patterns. My colleague Chris Kacher has frequently brought up the idea of the stock market's technical action as being of a highly fractal nature, with each observable pattern breaking down into and containing within its structure smaller patterns and sub-patterns. I must give credit to Chris in helping to inspire my clarification of what I was seeing on my charts, and his concept of a fractal market is shown to be quite valid on the short side. Fractal technicals can be thought of in simple terms by taking a basic cup-with-handle base formation on a weekly chart and then seeing that the handle of this pattern in turn consists of another, smaller or fractal cup-with-handle formation. If we then look at a 60-minute chart of the same pattern, we might notice that the handle of the fractal cup-with-handle in turn consists of an even smaller cup-with-handle formation. This is a basic illustration of what we mean when we talk about fractal chart patterns.

Sometimes, however, the fractal nature of a pattern can also be observed on a single time-frame, such as the example of a smaller head-and-shoulders formation forming within the head of a larger head-and-shoulders formation. In this case, the fractal components can all be seen in one time-frame on the weekly chart. In any case, the use of fractal chart formations can be very useful in helping one exploit a top in a stock long before the large head-and-shoulders formation becomes obvious on the weekly chart. This also underscores why the sole use of weekly charts in short-selling, and in particular in trying to teach short-selling, is highly deficient. This book corrects all of that.

The short-selling model book section in Chapter 10 of this book is also vastly different from the one in the 2004 book. This new model book section shows both weekly and daily charts, and both time-frames are annotated in detail. Each short-selling example also includes relevant notes, as well as space for readers to make their own notes as they engage in more detailed study. I highly recommend HGS Investor Software (www.highgrowthstock.com) as an excellent analytic and charting tool for use in studying the short side of the market. The great advantage of this particular product is that it allows one to easily scroll backward in time and therefore facilitates the study of a stock's historical price/volume action. This particular feature is also useful for studying the historical long side of the market as well.

The final difference between this book and the 2004 short-selling book is that this time around I have the luxury of being backed up by Chris Kacher with respect to the research that went into this book. Because I am the only one between the two of us who actually sells short, I was the only one who could write and produce this book. That is why the book is written in first person by me, while the research backup and editing assistance of Chris Kacher keeps things tight.

Finally, I think the material in this book is not only quite useful for would-be short-sellers, but also for investors and traders who stick to the long side of the market. The truth is that understanding short-selling is also all about understanding how leading stocks top. That sort of understanding not only helps short-sellers make money when “good stocks go bad,” but also helps those playing a leading stock on the upside and milking a strong uptrend optimize their long-only process by being able to recognize when their good stock has gone bad and the time to sell has finally arrived. When considering whether this book is right for you, this is an important factor to take into account.

To me, short-selling encompasses all of the common sense methodology and wisdom that runs through the works of William J. O'Neil, Richard D. Wyckoff, and Jesse Livermore, or the OWL, as we refer to them. While the roots of my investment methodologies and philosophy lie in my tenure at William O'Neil + Company, Inc. from 1997–2005 as a vice president, internal portfolio manager, and head of O'Neil's institutional advisory business, my current work as a short-seller (and as a buyer of stocks on the long side) makes me more of an “OWL Disciple” than an O'Neil Disciple. Short-selling is a complicated game to play, and as I already noted, is much like a diamond with many, many facets. Thus it becomes a fascinating process that most certainly contributes to the element of self-discovery that every trader and investor experiences over time as they expand and refine their skills.

As Chris Kacher and I wrote in our first book:

Like athletes and thrill-seekers who engage in activities that seem extremely dangerous, almost to the point of the unthinkable, to those who live more normal lives, we as traders seek the “rush” that comes not from a successful trade, but from the experience of being entirely in the present as we operate “in the zone,” and a certain fluidity and calmness pervades our actions as we engage the markets in real-time. Ocean wave surfers experience this as the intensity of riding a powerful wave-form that forces them to focus on the matter at hand as a matter of sheer survival. Focusing on the matter at hand forces one to operate entirely in the present – there is no worrying about yesterday's problems, or tomorrow's challenges, there is only the “now.”

Nowhere does this concept hold true more than when one is selling short and doing it well. Given the inherent risk and danger of short-selling, it might be considered the stock market equivalent of big-wave surfing. Certainly, as a trader, there is no greater satisfaction to be had than being “in the zone” on the short side and making big money during a period where the vast majority of investors on the long side of the market are losing their shirts. Good luck!

GIL MORALES

Playa del Rey, California

November 2014