What Is Selling Into Strength?

Selling into strength refers to the practice of selling out of a long or into a short position when the price of the asset is moving higher. This proactive strategy is designed to preempt an upcoming reversal in the price by playing the contrarian into a bull run.

Selling into strength can be contrasted with buying into weakness.

Key Takeaways

  • Selling into strength is a proactive and contrarian trading strategy where a trader takes short positions as the market rallies.
  • Sell strength traders will typically either go short a security or buy put options in a preemptive move to capture the entire expected downside.
  • These trading strategies usually entail a lump-sum method of going all in on a short, or else averaging in over time.
  • It is seen as a conservative strategy for profit taking and trying to avoid timing a market high.

Understanding Selling Into Strength

Selling into strength is often seen as a conservative strategy for investors selling out of a long position since they're avoiding the temptation to time the market. On the other hand, the strategy is aggressive for traders entering into short positions since they're trying to time the market. If the stock continues to rise, the short seller could see losses mount and be forced to cover their position before a reversal occurs.

Many traders will wait for confirmation of a change in price movement before selling a long position or entering into a short position. However, by the time a reversal is confirmed, it may be too late and the trader may end up losing out. Thus, by trading against the prevailing trend in the anticipation that it will soon reverse, selling into strength provides a greater margin of safety. As the saying goes, "missed money is better than lost money".

Strategies for Selling Into Strength

There are two primary strategies that sell strength traders and investors can use when going short:

  1. Lump Sum - Selling the entire long position or buying the entire short position at the same time.
  2. Averaging In - Selling the long position over a period of time to reduce exposure as the expected reversal approaches, or conversely, entering into the short position over a period of time to reduce losses until the reversal occurs.

In addition, traders may look at other technical indicators or chart patterns when deciding to sell into the strength. A great example is a stock that is trending higher, but losing momentum, over time. With the momentum moving lower, a reversal could be approaching, and it might be a good time to sell into the strength before the actual reversal occurs.

Example of Selling into Strength

Suppose that a trader believes ABC stock will rise above $5.00 but expects it to reverse at $5.75. If the trader buys ABC stock at $5.00 and sells when the price hits a predetermined exit price of $5.50, that trader would be selling into strength rather than trying to capture the last $0.25 of profit before a reversal. Conversely, a short seller may sell into a rising price with the anticipation that the stock price will soon decline.