On our desk there are trades that you must be in. There are setups that if offered by the market you must exploit. You should have a list of the trades that you must be in. And if this trade results in a loss you are not annoyed. In fact you are grateful for the opportunity. There are trades where the risk/reward is so favorable that you just make the trade and wait for the result.

One of our experienced traders was cussing himself out under his breathe today at a few of these setups that he failed to execute. In fact, he asked me to kick him off the desk. Back in the day it was not uncommon to get kicked off the trading desk. And I would have but he was up too much money. But there should be more of that in trading today. This experienced trader knew that he had made a few unpardonable errors. All we can do as traders is take what the market gives us. And when it gives we better take.

Today we had such a trade with XTO (chart below). XTO priced a secondary for about 5 percent of its float at 48. If a stock prices a secondary and the stock trades below that secondary price there can be a sharp downmove in that security. You play the downside momentum.

Well today XTO traded below 48 but found intraday support at 47.75. XTO traded back to as high as 48.30. I was not sure whether XTO would trade higher or lower than 48 but I knew from the price action on the Open that below 47.75 was a definite short and above 48.30 was a definite long.

XTO finally traded below 47.75 and I got aggressively short. If you look at the chart you can see that that was a chop. It was merely a question of how well I would hold the stock into the downmove. I lightened up every time XTO slowed on the way down. But overall it was a huge chop.

This is a trade that you must be in. You should make this trade every time. There is nothing to think about. Just hit the stock and watch the inside market to see if the stock will get crushed. On our prop trading desk we call out, “Crush it! Crush it like a grape.” Hey it’s a long day and we have to find ways to entertain ourselves. But we are short every time we see this setup and we aint covering until we have a very good reason to cover.

Consistently profitable traders have a list of setups that they will exploit with every opportunity. And with these setups they will add size and hold for an extended move. They are playing for a huge chop. When I start a position in such a trade I like to count to thirty. Seriously you should let the stock breathe. And there is always a tendency to cover a stock too early in a situation like this. So count. And don’t cover unless there is a very good reason to do so.

Today was another solid day for SMB. I hope you trading went well. Make sure you have a list of trades that you must be in.