Bella,
How is everything?
I have a few questions for you. I know I always bombard you so if you are too busy to answer no worries at all.
1. How do you know when it is time to scrap a trading play? I have tried to fade names that have reported good numbers many times and I have lost my hat. COH today I thought it was a safe short +3.00 and already at a 52 week high and the stock is now +5.50. My strategy is not to fade strong stocks but I do like to fade stocks when I think the move is “excessive”. Anyway I have come to the conclusion that it is time to do away with fading strong names the same day as earnings. I always get stopped out at a loss. Am I giving up too early, should I just tweak what I am doing?
2. Is it moronic to fade stocks with strong earnings?
Bella Responds
I could start to highlight the fade trades that work given your parameters but I am struck by this simple thought:
Why don’t you just get long these stocks?
Mike Bellafiore
Author, One Good Trade
9 Comments on “Traders Ask- Am I a Moron for Fading Stocks In Play?”
Obviously the odds do not favor your strategy of fading stocks. Stick to the highest probable setups and ONLY play those ..
You really need to know on which side the size is and you also need to know what volume the players are watching, for if its anemic going through they will jump all over the longs. Rather than pick some price, let the trade tell you when and where, easiest way I know is waves, which if you are wrong then defines risk, which you can keep small by position sizing. Takes a long time to get it right, but fading break outs is more common these days as the markets have changed with HFT.
you can fade stocks not only to short, but to decide where to take profits using the same principles. Twitter post half hour ago : “TheRTTrader sold 1/3 $RIMM 56.34, wave count on the stretch run, let the rest ride, see where mr. market wants to take it” Check the chart and you’ll prolly see why.
It doesn’t matter whether you think the move is excessive or not, and if the earnings were good, bad, not bad enough, or whatever. What matters is is the stock in play? Is it trending up or down today? Can you get a good entry with reasonable risk/reward? Is the overall market playing nice?
As Bella said, it’s much easier to go with it, in either direction, than fight it.
I sympathize with the author here. Going long is easier said than done. I don’t know how many times I’ve gone long and the euphoria dies down leaving you with a high fill miles away from where the price settles. If the stock isn’t a liquid stock more often than not the stock proceeds to crash after the news.
I’ve found some success shorting a few minutes after open at the peak of the euphoria but generally the short needs to be exited pretty quickly once the retracement starts to firms up rather than holding for days. Alternatively perhaps set a policy of waiting until a base is formed after a retracement and then go long?
On the show Wall Street Warriors that SMB features in (free plug here fellas 🙂 ) there’s a rather cocky fella that fades the news as your trying to do with great success. He does this using small caps stock. I could see this working quite well as I’ve often seen these tank after the news as mentioned above. Maybe this will give you some ideas?
LOL – Yes, just keep it simple.
There are def fade trades to be made with such stocks but the author has found a pattern. Jackpot! The pattern is opposite of what he wants from a stock. But the mkt doesn’t care what you want. Now your work is to find the longs that make sense to the author since he has done so well to find super strong stocks.
Moronic actions do not make you a moron, which is nice because your actions as described are moronic. It makes you a contrarian, stubborn son of a B. If that is your strength then learn how to catch reversals, not expect or hope for one just because the stock is evidently going up farther than you think is kosher.
I would say that if you’re going to get short these kind of stocks, wait till they break below the opening price and then find a low risk spot like a retracement to the breakdown.
I once traded with a guy that faded strong stocks and did well, but he was extremely focused on the level two so he could find that spot where the buying would dry up on a move. He was good at it.
Alot of guys fade stocks very well in our prop office, but only do so on stocks with no apparent news event. They never touch earnings stocks (for fading anyways). just an idea.