One Good Trade E-Book

Mike Bellafiore

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 738

Veröffentlichungsjahr: 2010

Beschreibung

An inside look at what it really takes to become a better trader A proprietary trading firm consists of a group of professionals who trade the capital of the firm. Their income and livelihood is generated solely from their ability to take profits consistently out of the markets. The world of prop trading is mentally and emotionally challenging, but offers substantial rewards to the select few who can master this craft called trading. In One Good Trade: Inside the Highly Competitive World of Proprietary Trading, author Mike Bellafiore shares the principles and techniques that have enabled him to navigate the most challenging of markets over the past twelve years. He explains how he has imparted those techniques to an elite desk of traders at the proprietary trading firm he co-founded. In doing so, he lifts the veil on the inner workings of his firm, shedding light on the challenges of prop trading and insight on why traders succeed or fail. An important contribution to trading literature, the book will help all traders by: * Emphasizing the development of skills that are critical to success, such as the fundamentals of One Good Trade, Reading the Tape, and finding Stocks In Play * Outlining the factors that really make the difference between a consistently profitable trader and one who underperforms * Sharing entertaining, hysterical, and page turning stories of traders who have excelled or failed and why, many trained by the author, with an essential trading principle wrapped inside Becoming a better trader takes discipline, skill development, and statistically profitable trading strategies, and this book will show you how to develop all three.

Leseprobe

Table of Contents

Title Page

Dedication

Copyright Page

Preface

CAST OF CHARACTERS

Acknowledgments

PART I - Inside a Prop Trading Firm

CHAPTER 1 - These Guys Are Good

WELCOME TO THE WORLD OF PROPRIETARY TRADING

A FIRM’S GREATEST ASSET: ITS TRADERS

BUILD FROM YOUR POSITIVE BASE

CHAPTER 2 - One Good Trade

DEFINING A BAD SALE

YOU ARE A TRADER, NOT AN INVESTOR

THE FUNDAMENTALS

PROPER PREPARATION

HARD WORK

PATIENCE

A DETAILED PLAN BEFORE EVERY TRADE

DISCIPLINE

COMMUNICATION

REPLAYING IMPORTANT TRADES

MONEYMAKER’S ONE GOOD TRADE

CHAPTER 3 - A Good Fit

WHO GETS HIRED?

A RECRUITMENT PROCESS

CAN A FIRM ALWAYS SPOT THE NEXT GREAT TRADER?

THE PROS AND CONS OF RECRUITING EXPERIENCED TRADERS

A GOOD FIT FOR THE TRADER

A GOOD HOME

PART II - Tools of Success

CHAPTER 4 - Pyramid of Success

FIRST, BE UNORIGINAL

SURVIVE THE LEARNING CURVE

FOCUS ON IMPROVING EVERY DAY

ASK THOUGHTFUL QUESTIONS

TALK SHOP

DEVELOP A DAILY WORK PLAN

BOUNCE BACK FROM DEFEAT

ELIMINATE YOUR MISTAKES

RESPECT THE MARKETS

MASTER BASIC TRADING PLAYS

LEARN TO EXECUTE ORDERS QUICKLY

FINE-TUNE YOUR FOCUS

CONTROL YOUR EMOTIONS

THE GOOD NEWS

CHAPTER 5 - Why Traders Fail

THEY DON’T LISTEN TO THE MARKET

THEY DON’T LOVE TRADING

THEY CAN’T HIT STOCKS THAT TRADE AGAINST THEM

Smiley: Smiling Back to Hong Kong

THEY HAVE UNREALISTIC EXPECTATIONS

THEY’D RATHER BE RIGHT THAN MAKE MONEY

DON’T FORGET: YOU’RE A TRADER, NOT AN INVESTOR

CHAPTER 6 - Live to Play Another Day

JTOMA: FROM THE ABYSS TO CNBC

DON’T FOCUS ON MAKING PREDICTIONS

YOU MUST BELIEVE

STOPPING YOURSELF OUT (GETTING FIRED)

STARTING TOO QUICKLY

NOT EVERYONE GETS INTO AUGUSTA

PART III - Getting Technical

CHAPTER 7 - Stocks In Play

WHAT IS A STOCK IN PLAY?

WHAT IS A GOOD INTRADAY STOCK?

WHY TRADE STOCKS IN PLAY?

THE IMPORTANCE OF PICKING THE RIGHT STOCKS

BLACK BOX ALGORITHMS ARE NOTHING TO FEAR

SHORTENING THE LEARNING CURVE

FINDING STOCKS IN PLAY

CHAPTER 8 - Reading the Tape

THE TAPE TALKS TO YOU

I HAVE A DREAM

A RIP SAVED

COMBAT HIGH FREQUENCY TRADING

READING THE TAPE 101

PUTTING MORE TRADING PLAYS IN YOUR QUIVER

WHEN AND WHERE TO “LOAD UP” AND STILL LIMIT YOUR RISK

A LOVE AFFAIR WITH CHARTS

HOW DO I READ THE TAPE?

CHAPTER 9 - Maximizing Your Profits with Scoring

SETTING YOUR MAXIMUM INTRADAY TRADING LOSS

TRADING BASED UPON THE TIME OF DAY

CONSISTENCY

PROPER SIZING

WHY COMPARISONS CAN BE HARMFUL

BE MENTALLY AGILE

STAY WITH IT

IT MAY TAKE TIME TO GET ON THE RIGHT SIDE OF A TRADE

DEVELOPING IF-THEN STATEMENTS

KNOWING YOUR BEST TRADING PLAYS

HOW TO END A TRADING SLUMP

THE CHEETAH AND THE TRADER

PART IV - The Trader’s Brain

CHAPTER 10 - Trader Education

USING VIDEO TO REVIEW TRADES

PRACTICING TECHNIQUES FROM TOP TRADING PSYCHOLOGISTS

MENTORING

LEARNING FROM TRADERS ON THE DESK

AND YES, WE DO HAVE DEEPER POCKETS

ENFORCING TRADING RULES

THE BANTER ON THE PROP DESK

COMPILING TRADER STATISTICS

SECRET PROJECT X: FINDING CUTTING-EDGE WAYS TO TRAIN TRADERS BETTER

CHAPTER 11 - The Best Teacher

NEVER SATISFIED

HIGHLY MOTIVATED

COMMUNICATE CLEARLY

BUILDS ON A FIRM FOUNDATION

YOU SAY TOMATO, I SAY TOMAHTO

LOOKS INWARD

PRACTICES PATIENCE

GETS TOUGH

SACRIFICES

SET FIRM VALUES

CHAPTER 12 - Adapt to the Markets

THE ASIAN FINANCIAL CRISIS

THE INTERNET BOOM

THE BOUNCES OF 2001

9/11

A BEARISH CYCLE IN THE EARLY 2000S

THE SPREAD OF THE PENNY

THEN CAME HYBRID

THE UPTRENDING MARKET

THE HOUSING CRISIS

THE PRICES OF OIL AND GAS SKYROCKET

THE NEAR COLLAPSE OF THE U.S. FINANCIAL INDUSTRY

ETFS EXPLODE IN POPULARITY

TRADES2HOLD

CHAPTER 13 - The Successful Trader

Bibliography

About the Author

Index

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.

The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.

For a list of available titles, visit our Web site at www.WileyFinance.com.

To my Mom and Dad for their unconditional love.

Copyright © 2010 by Mike Bellafiore. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Bellafiore, Mike.

One good trade : inside the highly competitive world of proprietary trading / Mike Bellafiore.

p. cm. - (Wiley trading series)

Includes bibliographical references and index.

ISBN 978-0-470-52940-9 (cloth); ISBN 9780470648971 (ebk); ISBN 9780470648988 (ebk); ISBN 9780470649008 (ebk)

1. Speculation. 2. Derivative securities. 3. Investment banking.

4. Competition. I. Title.

HG6015.B.64-dc22

2010005945

Preface

As the U.S. financial system neared the verge of collapse in the fall of 2008, a 23-year-old prop trader I know was about to pocket $30,000 for a day’s work. Rewind to 1998 when some twenty-something prop traders, discards from the big banks, were putting away more than $10-25,000 a day without charts, CNBC in the background, a newsfeed, or even air conditioning. So what happened between 1998 and today? The Internet Boom and technical advances caused an explosion in proprietary trading but there was never a book written about it. Now there is.

During the past four years I have been growing a prop trading firm with my childhood friend, Steve Spencer. We started with nothing (not even a phone) and today our firm, SMB Capital, employs more than 60 traders. One Good Trade offers all the important lessons the market has taught me over the past 12 years in and around prop trading. I share these market lessons while introducing a cast of characters, some of whom have succeeded, and too many who have failed.

We will start with a look at traders to be emulated like MoneyMaker in Chapter 1, whose previous career as a professional golfer left him with a superior ability to focus, which he now uses daily to chop up the market. You will go inside this previously closed world of prop trading to learn who gets hired (classic Joe Biden story enclosed), how we trade (depends on the market), how we find the stocks we trade (you are only as good as the stocks you trade), our game-changing market fundamentals (One Good Trade), and our superior trading skills (It’s called trading!). You will garnish a savoring taste of what is really important to become a successful prop trader.

Trading is about skill development and discipline. Unfortunately, too many people think trading is just about making predictions, loading up, and being “the man” by holding stocks (you will meet Crabby, who predicted the whole run in oil and never made a dime as a trader). Being a consistently profitable trader is about doing the thousand little things every day - like proper preparation - that impact your P&L.

As the partner of a proprietary trading firm, I spend a great deal of my time teaching. While I still trade actively, I am mostly a trading coach. What I teach my students and have learned from my traders I will share with you. Lessons like the importance of adapting which one experienced trader, Point-and-Click, was unable to do; he now sells insurance in New Jersey.

The light I shine on the world of prop trading will include my mistakes and those of other prop traders. A great trader is an elite performer. Elite performers spend every day trying to improve. Every day we trade is an opportunity to learn from the market. My mistakes and those of other prop traders are just gifts from the market for us to improve, and they will be shared so you can learn.

My firm, SMB Capital, will be used throughout this book as an example of how prop firms operate. SMB and its traders have been featured in the TV documentary Wall Street Warriors, appear regularly on CNBC, and have four regular spots on StockTwits TV. It’s an entertaining place! Many of the learning experiences and anecdotes in this book come from my tenure as partner.

Too many traders do not know the stocks to trade and we will discuss how we find the Stocks In Play. Too many new and developing traders cannot Read the Tape and we will argue how that hinders their results. Most importantly, I will walk you through this P&L-changing skill.

After a speaking engagement, I was approached by Dapper Don to explain the value a prop firm can offer and I spend a chapter answering his question. I will debunk the myth that a new trader should seek out a superstar trader to learn best. Many new and developing traders could improve their P&L if they just understood how to “Score,” and we will illuminate the importance of loss limits, ending a trading slump, and keeping excellent trading statistics.

A spot on a prop desk is a dream job for many people, yet they do not know how to succeed once they arrive. Bloomberg, CNBC, and Fox offer endless hours of professionals pontificating their opinions. Still, I know of many new and developing traders overwhelmed with information and empty with ideas to improve. We will use an old teaching technique of the head basketball coach at UCLA, John Wooden, to offer valuable suggestions in Chapter 4 (Pyramid of Success).

Along my trading and teaching journey, market fundamentals have been hammered into me by my boss, Mother Market. A trader with poor fundamentals is a ticking time bomb. That is why each trade for us is One Good Trade. At Duke University, Coach Krzyzewski yells, “Next Play” to his players. At SMB, we think One Good Trade, and then One Good Trade, and then One Good Trade. We judge each of our trades based upon whether we have followed seven fundamentals that compromise One Good Trade.

I have successfully navigated many different markets these past 12 years of trading. I will share my journey with the trading set-ups that worked best for each distinct trading period. Most importantly, I introduce the principle that has allowed me to profit in so many different markets: I adapt.

Welcome to a trading world where you can make your own trading decisions, each day is new, your upside is unlimited, and you likely sit around some funny people. In short, prop trading to me is the very best job in the world.

For the developing traders who are underperforming and for those interested in becoming new traders in the future, this book was written for you. The market has taught me the thousands of little things required to become successful. Many are undervalued by those who have not reached their trading potential. Welcome inside the highly competitive world of proprietary trading. A funny, exciting, enthralling place only for elite performers who master all the skills demanded by Mother Market.

CAST OF CHARACTERS

There are some traders you’ll get to know very well through reading this book. Traders are known for using nicknames around the office, and our office is no exception.

Mike Bellafiore, Bella Steve Spencer GMan JToma Roy Davis Alexander James The Enforcer Franchise Dr. Momentum MoneyMaker The Yipster Z$ (ZMush, Mush, Mushy, and Z) G

In addition to their stories, you’ll also hear from readers like yourself in the “Traders Ask” sections of the book. There are some questions about prop trading that I receive time and again via e-mail or the SMB Capital blog, and this will help answer some of them.

MIKE BELLAFIORE June 2010

Acknowledgments

One Good Trade was a collaboration. It could not have been written without extensive contributions from the extraordinary team at Wiley and SMB Capital.

And without all those with whom I have traded, trained, mentored, met, shared emails, conversed via phone, heard of, and read about. To all of you, I offer my deepest gratitude!

Thank you to my ghost writer Chris Gillick for his brilliant writing. You are an extremely talented writer and good friend.

Thank you to my partners GMan, Gilbert Mendez, and Steve Spencer for covering for me all of those days I was sequestered writing this book.

Thank you to my best friend, Steve, for helping transform my idea to build the best equities training desk on the Street into our firm, SMB Capital. What an incredible, exhausting, challenging, and rewarding life experience it has been. I wouldn’t have wanted to do this with anyone else.

Thank you to the best trading coach I know, Dr. Brett Steenbarger, for encouraging me to write this book and helping me make it happen. You gifted me the idea for One Good Trade, which I may have never contemplated on my own. You have inspired me to become a better teacher, mentor, trader, author and person.

Thank you to all those who have trained and traded with SMB. The best part of SMB will always be you, our traders.

Thank you to Alexander James for your invaluable daily input into this project. Everything you touched always became better.

Thank you to Charles Basner who makes everyday easier for me and a little bit more enjoyable. I hope you enjoy my Seinfeld references.

Thank you to Roy Davis, the best person I know to run SMB Training. When you do great work, you attract remarkable people, which is best demonstrated by your presence at SMB.

Thank you to our interns for your help with research:

Monique Yin Krysten Sciacca Bradford Arlington Grant Yang Joe Brummitt Pedro Machado Kurt Von Weisenstein Alex Beygelman Alex Sabharwal Vishnu Anand Patrick Traynor Patrick Daniel Violet Wang Ben Klixbull Brigitte Tugendhaft Succharita Gaat Jae Heo Jay Zalowitz

When you become great traders please remember us.

A special thank you for those who took the time to endorse my book. You are all the best at what you do! I am tremendously grateful for your kind words:

Howard Lindzon, Tim Bourquin, Dr. Brett Steenbarger, Charles Kirk, Jason Gardner, Nadav Sapeika, Brian Shannon, Corey Rosenbloom, Damien Hoffman.

Thank you to Meg Freeborn for your awesome advice on content. Thank you to Melissa Lopez for walking me to the finish line. Thank you to Tiffany Charbonier for assisting on this brilliant cover. Thank you to Kevin Commins for finding me, giving me this opportunity, and steering me through this rewarding experience.

To my mom, your words are in every sentence. To my dad a huge hug and thanks for showing me the value of hard work though never saying a word on the topic.

To my beautiful fiancée, Meghan, the best part of my every day is my time spent with you. My best One Good Trade was committing to you.

To all those who have followed SMB on twitter @smbcapital, through our blog at www.smbtraining.com, on CNBC, on StockTwits TV, and reached out to me, thank you. The privilege to meet you and hear your trading war stories is my favorite part of writing.

PART I

Inside a Prop Trading Firm

CHAPTER 1

These Guys Are Good

I belong to the most exciting part of Wall Street that no one pays attention to. That is, until now.

The kind of trading firm I co-founded, a proprietary trading firm, is not a bailed-out government bank, a broker-dealer, or a hedge fund, though it does run on some of the same core principles as those places.

Proprietary trading firms do somewhere between 50 and 70 percent of all the equity volume on the Street on any given day. Yes you read that correctly: 50-70 percent. Brokers bank hundreds of millions on firms like ours each month in trading commissions. This money flows to the coffers of clearing firms that take no risk but enjoy the rewards of the traders’ hard work. The government also makes out nicely, raking in hundreds of millions annually in SEC taxes. (I’m not complaining, just offering facts.)

To offer some background, proprietary trading exploded during the Internet Boom. When I first began trading in the late 1990s, there were only a few firms hiring recent graduates to trade. There are no exact numbers on how many proprietary trading firms exist today, but the general consensus is more than a hundred and less than three hundred. Obviously this number is now much more than the handful that existed when I first began.

Unlike most firms on the Street, proprietary firms have no clients. We do not sell a product or help someone else sell a product. We do not take other people’s money and speculate it on their behalf. A proprietary trader’s after-hours schedule is not booked with dinners at New York City steakhouses like Sparks, drinks at the trendy Buddakan, or Rangers games (the Knicks are presently unwatchable). We don’t need to schmooze.

We eat what we kill. Our profits are generated solely from the bets we make on our traders. When we are wrong, we lose our money. When we are right—and let me say that is a lot more fun—we keep a percentage of our winnings.

WELCOME TO THE WORLD OF PROPRIETARY TRADING

Proprietary trading (or “prop trading” for short) is done for the benefit of the company’s partners and employees only, not for the benefit of any client. The firm is the client. A prop firm’s traders actively speculate on stocks, bonds, options, commodities, derivatives, or other financial instruments with its own capital as opposed to customers’ money.

There is no money made on insider tips at the legitimate prop firms. I wouldn’t know an insider unless he walked onto my trading floor and announced, “Hey I am an insider. Get long BNI, Buffett is about to buy a stake in the company.” My news comes mainly from Internet sites like briefing.com and Bloomberg.com—sites the whole world can access. Some proprietary firms have an interest in obtaining private research from institutional banks like Goldman Sachs and they can pay for access to it. We have access to some of this data but it does not make a difference. At my firm, SMB Capital, only the floor manager has a phone (his mom calls a lot). We depend on our trading talent. We eat what we kill. I wouldn’t have it any other way.

There are some months when a prop trader works 50 hours a week and takes home no money. Heck, there are some months when a trader works even harder and loses money. I spent 2002 unable to make a dime. On the contrary, there have been days that a prop trader is up over $10k by 9:35 AM. He punches a few keys, the stock does what he thinks it will do, and he books these outsized profits faster than most drink a cup of coffee. In fact, there have been some mornings (Black Friday 1999, for example, when I sauntered onto my trading floor, turned on my computer screens, and saw that my account was up over 50k.) Now that is the way to start your morning! This is not one of those jobs where there are guaranteed contracts with a biweekly check that has the same numbers sprawled across the pay stub.