During our video review session intraday today we watched some tape of TGT. One of our experienced traders, NYU, faded TGT into its second upmove on the Open at 33.75. There was a struggle at 33 and the buyers won sending TGT quickly to 33.80. NYU thought the move was overdone and got short. This was a poor fade trade. One that I see new traders too often make. And one that they shouldn’t. Let’s discuss.

First before I begin some advice. We do not let new traders fade when they first begin trading with SMB. If you are a new trader learn this trade after you have established yourself as a profitable trader in today’s momentum market. These are difficult trades. Most scouts preach that it takes 1500 ab’s in the minors to develop into a major league hitter. This is kinda how I feel about fading. You need a ton of experience first. Stick with support and resistance plays first.

Things I did not like about this fade:

1) The win rate was too low
2) The risk/reward was poor
3) There was no way to tell where the top would be at this moment
4) I only fade a stock that is at least two standard deviations from its correct temporary price. And it was way too early to determine this.
5) It was just early to fade without historical knowledge and TGT was still in an uptrend
6) BBY rallied after its earnings and now here was another retailer bouncing on the Open
7) It was just wrong. To be a great fade trader you must make thousands of fade trades. And that one was just not right. As much as I have conceptualized my reasons above the trade just didn’t look right on the tape.

When you fade your upside must be 5 with a downside of 1. With this trade NYU’s downside was probably 1.23c with and upside of maybe 40c. TGT showed no signs of a top. In fact it was in the middle of only its second move. The potential intraday top of TGT at this moment was much higher, possibly 35. This is not the ratio we are looking for. Further his win rate for this trade was probably 40 percent. The tape did not offer any evidence that TGT was about to trade lower. I do not fade unless I conclude my win rate is 80 percent.

I only fade when I have determined a stock is at least two standard deviations from its correct temporary price (this is based upon my experience as a trader and not mathematically). But to determine this I must either have watched it trade the past few days, which NYU had not done, or get a feel for TGT on this trading day. And it was way too early to have a feel for TGT at that moment. So we could not determine that TGT was at least two standard deviations from its correct temporary price at this moment.

We could discuss fade trading for hundreds of blogs. Hey maybe we will. I survived 04 and 05 by fading. I really learned how to fade during these years. Some were forced out of trading because they could not adapt. But check out the charts from 04 and 05 and compare them to today’s. You do not want to focus on fading today. This is a momentum trader’s market. There are fading opportunities, and I make my share of fade trades in this market, but again this should not be your focus. And as a new trader you should not be focusing on one of the harder trades with a market where it is wiser to follow the momentum.

We will find some time to discuss fading in some future blogs. This is a great trade to master. You are gonna need this trade at times. But not when you are a new trader. And not with this market.

Best of luck with your trading!