Monday, September 20, 2010

Bellafiore, One Good Trade

Mike Bellafiore’s One Good Trade: Inside the Highly Competitive World of Proprietary Trading (Wiley, 2010) outlines what it takes to win in intraday equity trading. His vantage point is prop trading, but most of the book applies equally well to the individual who is trading his own account from home.

One Good Trade is not a book of strategies, although it covers tape reading in some detail. Rather, it focuses on preparation, mindset, process, and performance review. Some of the material should be familiar to readers of Brett Steenbarger’s books and his still extant but no longer updated Traderfeed blog. But Bellafiore personalizes his discussions by introducing us to traders at SMB Capital, both successful and failed. Moreover, he provides enough information about SMB’s training program to jump start the education of the person who’s going it alone.

I’m going to limit this post to three takeaways from the book.

First, the virtues of tape reading over relying exclusively on charts. “I just don’t get it why people fall in love with their charts. There is so much more information from the prints, inside market, than the charts for short-term traders. And for long-term traders, reading the tape could dramatically improve their entry prices.” (p. 219) “[N]ot learning [how to read the tape] is like a basketball player not working on his free throws. This baller just decides to keep clanging his free throws and give up some easy points.” (p. 196)

Second, the importance of “if-then” thinking before entering a trade. For each specific trading setup there should be an accompanying if-then scenario. Bellafiore offers the following example of successive MOS trades: “Forty-eight was support. I got long. If 48 dropped the bid, then I would exit. It did, so I exited. If there were a held bid just below 48, then I would get long again. At 47.95, there was a held bid, so I re-entered. And I made a chop on this trade as MOS exploded higher. But what is most important is that I had predetermined plans of action with a handful of if-then statements. And then I just did what I told myself to do.” (p. 240)

Third, using video to review trades. SMB Capital records traders’ screens for later review. The independent trader using this technique wouldn’t have the benefit of mentor commentary, nor could he compare how he trades a setup to how his peers trade the same setup, so critical feedback would be much more difficult. But if the independent trader knows the kinds of things that tend to trip people up (position sizing, order execution skills, not exiting stocks that trade against them) he can probably improve his bottom line by identifying his own weaknesses.

The trader who faithfully follows SMB’s seven fundamentals (proper preparation, hard work, patience, a detailed plan before every trade, discipline, communication, and replaying important trades) will have made one good trade. “And this,” Bellafiore writes, “is what we do. Or certainly try to do. And we do it over and over again. We make One Good Trade, and then One Good Trade, and then One Good Trade.” (p. 35)

Bellafiore’s book is an inspiration, a kick in the pants, and a learning manual. The reader who puts its tenets into practice may just make one good trade again and again. Ka-ching.

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