Turning one good trade idea into One Good Trade

 

Say you have a really great short idea.

The stock is too high.  These prices are not sustainable.  The fundamentals of the company do not warrant this price as to where it is trading.  You just know the stock will trade lower.  This is a great short opportunity.

What do you do as a trader?

Often I deal with traders who feel the pain of a good idea that is not working as a good trade.  The drawdown on this stock that had to go down is painful.  Why is this stock not going down (they fret)?  Am I wrong (they worry)?  Do I need to cover and take my huge loss?

How do we take that one good trade idea and turn it into One Good Trade?

As a trader is the key part to the question.  From my seat, I see my tweet below as an option, but also how most active traders trade at their best.

Trade thesis- The stock will go down for these compelling reasons that may in themselves give  you a trading edge.

Setup in your PlayBook- You spot a trade setup from your PlayBook to express this short idea.

Confirmation on the tape- You see the sellers on the tape confirming your short bias.

Fight for price- You enter only if you can get the trade at a price where you risk/reward is asymmetrically positive.

All of this is necessary for One Good Trade.

There is an option 2.  And that is to just short the damn thing with a very clear and responsible max risk loss.  Some experienced traders take this trade as they fear missing a sharp decline lower, without a clear sell signal.  The key here is to stay within your responsible max risk loss and measure whether this trade, taking shorts based on a trade thesis without confirmation, is profitable for you.  From my seat, it is rare that I see success with this option.

*no relevant positions