One of our better traders stopped into my office today to discuss WFR.  He was curious where I started buying into its upmove on in the AM.  The conversation shifted to loading up in WFC.  We discussed good places to load up in WFC on Thursday.  Let’s discuss.

Developing traders often assume that the best place to load up on the short side is closest to the top. Developing traders assume that they ought to be lightest near the bottom of the downmove.  This is not necessarily true.  As traders our job is not to catch every penny of a move.  Our job is to find excellent trading set-ups where our downside is 1, our upside is 5, and our win rate is at least 60 percent.  This is our job.  This is what we do.

To the developing trader it may seem counterintuitive that our risk reward may not be best at a higher price when we short.   For example, a developing trader may assume that WFC offered the best shorting opportunity at 20 on Friday.  A developing trader may assume that the second best shorting opportunity was at 19.60 before its downmove to 17.50.  This is incorrect. 

With WFC on Friday the best short was $1.75 lower.   The short that offered an excellent risk/reward with a win rate of 80 percent was at 18.25.  Shorting WFC at 20 on the open was not a good trade.  WFC was still in an uptrend.  We do not short stocks in intraday uptrends, unless they are met with huge longer term resistance levels.  I did not like the short at 19.60 either because WFC was still in an uptrend. 

I did short WFC at 19 but this was not a place for me to load up on the short side.  WFC had a huge battle at 20. There was still a great deal of buying at 19.  WFC had gapped up and a one point downmove was not necessarily an indication that it had turned.  Often stocks this strong, drop a point, then there is some more buying, and the stock resumes an intraday uptrend.  Even though the intraday chart shows that WFC is in a downtrend at 19, you still must be cautious.  As an experienced trader I have learned that the downmove does not necessarily mean the stock had reversed.  

But at 18.25 WFC is clearly in a downtrend.  And at 18.25 there was a seller who would not lift.  And WFC was below 18.50 where there was a huge battle.  This is a short I will sink my teeth into.  This is a short where I will be aggressive.  And this is $1.75 from the top.  But this short was the best of all that were mentioned because it offered an excellent risk/reward, with an unusually high win rate.

As a developing trader understand what you do.  Understand your job.  Your job is to find high win rate trades with excellent risk/reward opportunities.  Your job is not to pick tops and bottoms.  You job is not to stress about catching every penny in a downmove.  You are a trader.  Traders simply make trades that mathmatically generate profits over thousands of trades.

CNBC is full of excellent prognosticators.  Hedge Funds and Mutual Funds are littered with outstanding long term traders.  You are a short term trader.  Your job is to trade to your strengths.  Load up where your risk/reward is best and not necessarily near the top or bottom.

Best of luck with your trading!  Don’t forget to follow us on twitter.