Seasoned Short-Seller Outlines 3 Strategies for His Remarkable Success

David Capablanca's journey in the stock trading realm commenced in 2016, and he became an active participant by 2020, a period that saw a surge in retail traders. The trading landscape has evolved significantly since his early days, now presenting a plethora of brokerage options that facilitate short-selling. This trading technique involves borrowing shares to sell at current prices in anticipation of buying them back at a lower cost, seeking to profit from the price difference.

Understanding the Short Squeeze Phenomenon

With the increase of short-sellers in the market, Capablanca points to the threat of short squeezes — a rapid increase in a stock's value causing short-sellers to purchase shares to cover their positions, often at a loss. He emphasizes that the market has a high concentration of short-sellers chasing the same trades, which magnifies the risk of such occurrences.

Achieving a 95% Win Rate

Despite the inherent dangers, Capablanca has honed a careful approach to short-selling, focusing on risk reduction and avoiding popular choices among short-sellers, which led to a remarkable 95% win rate in December — one of his strongest performing months. He meticulously journals his trades to refine his entry strategy and to identify patterns linked to short squeezes.

His diligent record-keeping revealed earnings of over $66,000 in December across three different brokerage accounts, thanks to an adherence to a trio of specific rules which he deems as the cornerstones of his recent success.

The Three Essential Signals

According to Capablanca, avoiding companies with exceedingly high debt, compared to their market cap — often eight to ten times the size — is of paramount importance. His stance is that such stocks are likely over-targeted by bearish traders, setting the stage for potential short squeezes.

His second rule involves steering clear of companies with 'nano floats', meaning they have less than 1 million publicly traded shares. This avoidance stems from the extreme volatility that can accompany such stocks, resulting in disproportionately high losses.

The third signal focuses on bypassing stocks with high institutional ownership, typically ranging between 40 to 60%. In these instances, the probability of encountering algorithm-driven price manipulations designed to force short-sellers out is significantly higher, compounding risk.

Capablanca's Philosophy and Precautions

Capablanca's philosophy gravitates towards choosing less popular stocks — what he refers to as 'boring stuff' — rather than what's trending, thus mitigating the chances of joining overcrowded trades prone to squeezes. He underscores the necessity of setting strict stop losses, a discipline some traders lack and consequently face larger setbacks. This risk management strategy is particularly crucial for short-sellers due to the potential for infinite loss.

short-selling, strategy, risk