And The Real Reason For That Losing Trade Was……..?

BellaGeneral Comments, Mike Bellafiore's (Bella's) Blogs9 Comments

Look at the chart above.  Say you shorted RIMM below 45 and got stopped out at 45.16, develop a reason for this loss and then continue reading.


Ok great to have you back with us.  Today during a teaching session Bad A$$ Mike shared a trade he made on the Open getting short RIMM below 45.  Steve whispered in his ear before the opening bell that 45 was a big level and it had downside potential.   Bad A$$ Mike had other ideas but he flipped to Steve’s right before the open.   He shorted below 45 and got stopped out.  Reviewing his work, the subsequent two points of down and frustrated he concluded,”I didn’t give RIMM enough room.”

I rose from the back of our training room and sauntered to the front.  “That is not why this trade did not work,” I challenged.  Then I asked a series of questions to our traders to elicit the real reason why this trade did not work for Mike.   I will offer the cliff notes version.

1) Bad A$$ did not evaluate the importance of the 45 level for him.  I asked him on a scale of 1-10 how important the 45 level was for him and he had no answer.

2) Bad A$$ did not know that there was fresh potentially negative news with RIMM.  I asked him if there was fresh news in RIMM and he claimed there wasn’t.  @vontrading corrected him.

3) Bad A$$ did not consider how weak or strong the overall market was.

4) Most importantly Bad A$$ missed the best short which was below 44.80.  RIMM went above and below the level but then finally broke this pattern.  There is a subset to support plays.  One is shorting when a stock breaks its range below and above the level.   Know your subsets.

Bad A$$ did not have a feel for the Big Picture with this trade.   And he missed a subset of a support and resistance trade.  But this had very little to do with his stops and had everything to do with his process.   When you reflect on your trading get the real reasons for your losses correct.  This will help you make the necessary adjustments so you progress.  Finally the answer is not always wider stops.

Mike Bellafiore
Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading

9 Comments on “And The Real Reason For That Losing Trade Was……..?”

  1. How do I know that the reasons I’m coming up with are correct? I could come up with reasons that seem/sound plausible and sensible, yet still fail to highlight the underlying problem(s) why my trades failed.

    Take Bad A$$ Mike’s case as an example. He believed the reason his trade failed was because he did not give his stock adequate room. Had you not corrected him, he might have just gone along believing that the reason he came up with is correct.

    I don’t mean to sound philosophical or argumentative, but I too try to come up with reasons why my trades win or lose. How do I evaluate the validity of the reasons I am coming up with?

    Thanks in advance 🙂

  2. If 45 is your level and you are short below 44.80, where would you get out at a loss?

  3. 44.8 was the prior support level. Until it breaks below that level, just technically, there’s a better possibility of brief support. If it breaks that level though you’re looking at a higher likelihood of a momentum trade downwards. It sounds like he acted on a tip that turned out to be solid, but jumped the gun on his trade before getting proper technical signals to do so. I agree that fresh news and awareness of overall market conditions would have also been an asset. Actually, if these two things had had bearish implications, he might have made a decent case for setting that stop a little wider (in direct proportion to his bearishness) with the belief that the buyers would lose out against more compelling market forces.

  4. I think the point is about making the trade setups your own not just following a “stock tip” (even though steve said it…). If you lay out a detailed plan for every trade you’ll know the levels and will always have a plan to get back in if a setup materializes. Having said that there would have been a great 1:5 – Trade shorting below 45.80.

  5. One imp element to learning is critical feedback. You need to find a good mentor or traders who can review your work.

  6. Bella,

    If 45 is my level then I am short below 45. If I am short below 45 and it does volume above 45 then I will cover. Spiking briefly above 45 does not scare me anymore. In fact if it does spike above 45 and I see a selling tail on the chart, it gives me much more conviction on my idea.

    I generally do not hit down below a level like 44.80 (especially in a nasdaq stock). If I did hit below 44.80 and it goes above and below 44.80 then I’ve become a ticket writing machine. If I hit below 44.80 and it spikes to 45 I’ve lost control of my risk since 45 is my level.

    Pretty interested in your view on this. Thanks.

  7. Bella,

    I was long RIMM yesterday. Entered a long after the bullish engulfing 5 min bar around 11:45 – added again (smaller postion) to the long after the first pullback around 12:15. Ending up selling both lots around 12:45 with a small gain. Because the realtive strength was negative, but postively sloping – I sense a trader vic 1-2-3 pattern and reloaded around 1:20 – using the very first bullish engulfing bar as my stop out. Well, it did, and stopped out at 43.08 for a small loss. What the heck????


  8. Eric,

    If you identify the subset above below the level pattern and there is significant volume done in this range I like the short below the bottom of the range. Where you cover depends on your trading time frame.


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