Learning from the rip in Tesla

BellaBella Daily Update

This week we wrote about how we were hawking a Tesla Bounce Trade.  See Four keys for a Tesla Bounce Trade.

Friday we took that trade.  And we took a rip.  See Taking a Rip in Tesla.

This weekend we challenged our traders to consider why the trade failed.  See Why did we take a rip in Tesla?

Look the rip sucked. But over the weekend traders and I have been discussing why we took a rip in Tesla.  What did we miss?  How can we learn from this rip?  How can we improve our trading systems?

Here is some of our learning…

One of our promising developing traders learned to wait for the confirmation first.  He took the imitative to reach out to the Senior Trader on his team for feedback on the trade.  In his words, he learned:

After talking with Shark, I realized I could’ve 100% done better by waiting for more price confirmation rather than fading the move into VWAP. Even though I did see confirmation from volume and the tape, I did not have full confirmation from PA yet. (edited) These small but essential nuances are what make or break traders in this market. While it may of been something that you could’ve gotten away with in 2020-2021, it just does not work like that in this market.

This is an important lesson from Shark to learn.

Jeff Holden, who helps with our trader development at the firm, shared a savvy lesson with developing traders at the firm.  It is important to watch how Tesla is trading relative to QQQ in the bounce.  TSLA was weaker than QQQ in the bounce and thus was a signal of weakness.  In his words,

One thing I thought was interesting was that an over extension trade showed up and triggered with the 2 min bar entry in QQQ as well and actually followed through where TSLA didn’t follow through even though it was relatively strong at that time to other high beta tech.
Super odd to see that.

This was another lesson for us to learn.

A member of our new Team Good2Gr8! at SMB shared another important lesson from this rip.  This trader found a signal from Tape Reading that was very clearly different and showed a very clear signal of weakness.  We had a trade decision to make on our longs with this signal.  This trader shared the exact moment of this that he recorded from the trading session and shared it with his team.  This trader pointed out in detail the specific signal from Tape Reading that were very clearly different and very clearly showing weakness.  In the words of this trader:

a couple nuances that I noticed real time offered a great risk reward short – more importantly this short could have been used as a way to take heavy profits off the long without taking away the potential of letting the long run. It’s so clean it really haunts me and I haven’t been able to stop thinking about it.

We learned that we had a trade decision signal from our Tape Reading skills that we could have used to improve our results.

(Scalping Was Hard, Until He Discovered This Little Trick)

Further, a systematic trader exchanged GChats with me on his TSLA Bounce Trade.  His testing found a real edge in the bounce trade that he took.  Given the failure of the trade he wanted to investigate further why the trade did not work.  This gave me an opportunity to give him something to consider.  In my words,

This gives this trader an opportunity to refine his Bounce Trade (or Fade Trade) system for the present market.  Perhaps we learned that in a bear market we need to see more evidence of a bounce before we take a Bounce Trade.

These are some lessons we learned from the Tesla rip.  We will continue to review and discuss other lessons.

It is okay to took a rip in Tesla…if you learn from it.


Important disclosures

Mike Bellafiore is the Co-Founder of SMB Capital, a proprietary trading desk, and SMB Training, which provides trading education in stocks, options, and futures. Bella is the author of One Good Trade and The PlayBook. He welcomes your trading questions at [email protected].