Today I overheard one of our new traders talking about fading GS around 71.20.  GS had stopped going down.  So this youngster, aka the Red Dragon, got long.  And I heard what he was doing.  I offered that I would prefer for him to continue trading GS on the short side until the downtrend was broken.  Since apparently I just work at SMB, the Red Dragon didn’t listen to Bella.  Oh this was a mistake on so many fronts.

First, you almost never get long a weak stock.  Second, GS still had a lot more potential downside risk.  Third, there wasn’t any real buying at 71.20 identifying a reversal.  It was just a function of time that GS was not below 71.20 as opposed to there was support.  And most importantly, since Bella runs the trading desk it is a good idea to listen.  Buying power now set to zero for the Red Dragon (ok just kidding here).

When I review a trade like the Red Dragon made I consider whether this technique would be profitable if I made 1000 like trades.  Fading a weak stock like GS because temporarily it could not trade below 71.20 is not a trade that will be profitable if made 1000 times.  I don’t like this trade.  I will only fade a weak stock, such as GS, and get long, if

a) 71.20 would not drop after being tested with significant volume or

b) I noticed the selling pattern CLEARLY change or

c) it has hit an important technical support level.

GS traded much lower than 71.20.  Most problematic about this fundamentally poor fade trade made by the Red Dragon is that he missed the short when GS traded below 71.20.  He was so consumed with exiting his long that he missed an easy and profitable short.

Looking forward to the day when the Red Dragon consistently beats me on our leader board.  But he isn’t gonna get there until he rids his trading of these fundamentally poor trades.  That GS trade above….  That’s not the way we do it.