How Do You Distinguish a Good Trade From a Loser?

Hi Bella,

I just read your recent post talking about the “All-In” trade on the SMB blog. Although my trading experience is limited (less than 3 years), I have on occasion seen these types of SEE IT trades. The most recent example was this past Friday in $LIFE. I know Steve kept the community in the loop that day & wrote about it on the blog, My Thought Process for LIFE. Just my personal take-away as to why that the stock was an A+ trade that day was via the tape. Buyers supported the $60 level with force early morning intraday. They sprayed the bid (hit the bid), yet it wouldn’t drop $60, which to me offered a low risk/reward opportunity. Moreover, this stock was highly in-play that day.

My question then becomes, how do you gauge whether a trade was a “good” trade after the fact. As a side note, I trade with a group of about 9-10 traders via an online chatroom. Often times, a trader will call out that they are long or short stock XYZ. I’ll quickly pull up the chart of that particular stock and give it my quick analysis if I’m not already watching the stock. Sometimes I see what they see. Other times, though, I honestly have no idea why they are in that trade (not in-play, choppy stock, etc.). If the stock goes against them, there’s not many comments in the chat. However, if the trade goes favorably, the chat is filled with “nice trade” comments (admittedly from myself as well). This is despite the fact that I didn’t like and/or understand the trade to begin with. Don’t get me wrong, there are some smart guys in that chat (I like to think of myself as one), but I don’t really know what to make of whether or not a trader should receive the “nice trade” comment. Is the trade a “good” trade if it is profitable? Or is it more on the risk-management – risk/reward plus position sizing?

I would love to hear your thoughts and/or experience with this paradox of being in an excellent trade but losing money, and being in a horrible trade and being profitable (most likely through luck). I’m just now realizing that this email is getting a bit lengthy, so I’ll wrap it up here.

Thanks again Bella and SMB for all the great educational content as well as providing a great trading community with which to share ideas and experiences.

@mikebellafiore

1) You should be in our SMB Real-time chat 🙂

2) Screen time, trading experience, lots of trade review. Good traders know when they are most likely right. In my next book The PlayBook I write that each trader should archive a series of setups that make the most sense to them. This process helps you determine your best trades from the ones you should eliminate.

Today an SMB Trader was chirping about LIFE. I took one look at how it was ticking in the inside market and knew it wasn’t worth my time at that time.

I shorted TRV, watched it drop quickly away from an intraday support level and knew to keep watching this stock (see my tweets). I have seen this pattern enough times in my trading career to know to keep watching it. I will write more about this later.

3) I love the idea of you in a chat with like-minded traders. Talking trading is a wonderful way to speed up your learning curve. Like Ray Allen has developed muscle memory on how to shoot a jump shot, so must you with trade setups with thousands of trade decisions presented to you.

4) I wrote about a daily practice schedule on One Good Trade, as a way to speed up your learning curve.

Talk trading

Watch tape of your trading setups

Do a PlayBook Trade after the close

Think trading

Review your trades in a group

Talk to your mentor

Have your trades reviewed by a mentor

Develop a way for you to practice after the close, to get more reps with your trading. All of this will make it easier for you to spot excellent risk/reward setups in real-time. This daily practice schedule is what will help you perform better in real-time.

It sounds like you are on the right path. Keep rehearsing your trading!

I hope that helps.

You can be better tomorrow than you are today!