Question

4 Why does convergence work to the advantage of the short seller?

Answer 1

A short seller is one who expects that the stock price will fall and take a short position to benefit from the market so he will short at high price and then close his position by buying at low price. Convergence is based on the idea that if a stock has moved beyond a certain point its mean value then the there is high probability that the stock price will fall, this is also known as mean reversion strategy where if the stock price has gone beyond a certain value then the price will fall to converge to its value and the short seller will take the position when the price moved beyond a range. For example, take the example of Bollinger band indicator if the price go beyond the two standard deviation up from it moving average value then the short seller will take a short position because there is a high probability the price will fall to converge with the band of the moving average value.