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A Practical Guide to Swing Trading by Larry Swing 
Short selling is also used to protect portfolios against erosion due to a broad market 
decline. Short sellers make money when stock prices fall. An investor can diversify a 
long portfolio by adding some short positions. The portfolio will then have positions 
that make money both when prices rise and when they fall. This reduces the 
volatility in the portfolio's returns and helps protect the value of the portfolio when 
prices are falling. 
By shorting carefully selected stocks that are priced near their peak but that will fall 
sharply if the market falls, an investor can use the profits from the short sales to 
help offset losses in his long position to protect the value of his portfolio. 
For example, Bob has most of his wealth tied up in stocks which she has bought 
because she expects them to appreciate in price. But she is concerned that the stock 
market is vulnerable to a sharp drop and wants to protect his savings while staying 
invested in the market. She knows that market drops are often caused by a change 
of investor sentiment from optimism to pessimism. She identifies businesses that are 
not worth much today, but whose stock price is high because people hold high hopes 
for their future prospects. These stocks should be especially susceptible to a negative 
shift in sentiment since optimism is what principally drives their stock price. She then 
sells these stocks short. If investors become more pessimistic and the market falls 
these stocks should fall more than most. Larry can use the profits from these short 
sales to offset losses in the rest of his portfolio. This will help to protect the value of 
his portfolio. 
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A Practical Guide to Swing Trading by Larry Swing