inside highly competitive world proprietary trading · traders achieve incredible wealth and how...

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$60.00 USA / $72.00 CAN

Proprietary trading fi rms do somewhere between 50 and 70 percent of all the equity volume in the U.S. markets on any given day.

But unlike most fi rms on the Street, proprietary fi rms have no clients. They do not take other people’s money and speculate it on their behalf. Proprietary trading (or ‘prop trading’ for short) is done for the benefi t of the company’s partners and employees only: the fi rm is the client. Their profi ts are generated solely from the bets they make on their traders. If they are wrong, they lose their own money. When they are right, they keep a percentage of their winnings. The world of prop trading is mentally and emotionally exhausting, but the rewards can be substantial, if you understand how to identify good trades, take profi ts at the right time, and limit losses.

In One Good Trade, Mike Bellafi ore reveals the inner workings of the proprietary trading fi rm he cofounded, detailing the challenges of prop trading and explaining why traders succeed or fail. In the process, he shows how you can use the skills and strategies developed at his fi rm to improve your own trading success.

The author takes you inside the world of prop trading to show how the professionals trade successfully, sharing all the important market lessons he has learned over the course of his career while introducing a fascinating cast of characters, some of whom have succeeded, and too many who have failed. He offers a range of straightforward trading strategies, such as breakouts from congestion, trading off support and resistance, and identifying consolidation setups. Perhaps more importantly, he explains the importance

of other, often overlooked skills critical to successful trading: developing consistency in monitoring markets and uncovering trading opportunities, discipline in executing trades, making rational risk/reward bets, and managing trading capital. He reveals those skills through illustrative stories of the growth of his trading fi rm and the ups and downs of traders he has trained.

Becoming a better trader requires discipline, a thick playbook of trading setups , and well-rounded trading skills, and One Good Trade will show you how to develop all three.

( C O N T I N U E D F R O M F R O N T F L A P )

( C O N T I N U E D O N B A C K F L A P )

INSIDE THE HIGHLY COMPETITIVEWORLD OF PROPRIETARY TR ADING

M I K E B E L L A F I O R E

MIKE BELLAFIORE is a cofounder of SMB Capital, a proprietary trading fi rm in New York City. He has had numerous trading articles published in SFO Magazine. SMB regularly appears on CNBC and TheStreet.com. SMB also hosts four trading shows a week on StockTwits TV, the fi rst Web-native fi nance television network. Bellafi ore’s trading strategies have been featured in Brett Steenbarger’s book, The Daily Trading Coach, and his trader training program was recently highlighted in Trader Monthly and on the TV documentary Wall Street Warriors. Bellafi ore is a regular contributor to the SMB blog, which provides market stories and trading advice. He was a speaker at the 2009 Traders Expo in New York. Bellafi ore is a graduate of the University of Connecticut School of Law and a former member of the University of Connecticut Board of Trustees.

INSIDE THE HIGHLY COM

PETITIVEW

ORLD OF PROPRIETARY TR

ADING

“Bellafi ore is a committed and dedicated trader and teacher of the profession. His book shows the same attention to detail and the fi ner points of making a career in trading.”

—Howard Lindzon, cofounder and CEO, StockTwits

“A terrifi c book for traders who desire to gain a complete understanding of the inner workings of proprietary trading and what it takes to become a consistently successful trader.”

—Charles E. Kirk, The Kirk Report

“If you’ve ever desired to journey into the professional world of a leading proprietary trading fi rm—how they organize their strategies, train new traders, select stocks in play, and even fi ght the mental game of trading, then One Good Trade is certainly the book for you.”

—Corey Rosenbloom, CMT, President, Afraid to Trade “One Good Trade is the only book I know that truly takes readers inside the proprietary trading world and explains what it takes to achieve career-long success.”

—Brett N. Steenbarger, PhD, author, TradeFeed blog and The Daily Trading Coach

“With One Good Trade, Mike Bellafi ore gives you a front-row seat to see what it takes to become a successful trader in today’s volatile markets. The stories and examples of how some traders achieve incredible wealth and how others crash and burn are great lessons for any aspiring trader.”

—Tim Bourquin, cofounder, www.TraderInterviews.com

“One Good Trade provides an insider view to the world of proprietary trading. If you are new to trading, you will learn that successful trading requires a lot of hard work, resiliency, disci-pline, continuous introspection, and a courageousness to challenge yourself and adapt.”

—Jason Gardner, Managing Director, Head of Trading, Kershner Trading Group

“Exceptional care coupled with a standard of excellence and attention to detail is the mantra that is at the foundation of SMB. Mike and Steve have created a unique and insightful angle to the development of new traders.”

—Nadav Sapeika, Chief Operating Offi cer, T3 Live, LLC / T3 Capital Management, LLC

“This book is a must-read for all developing traders and those who are interested in a good read about the behind-the-scenes goings on of a successful trading business.”

—Brian Shannon, author of Technical Analysis Using Multiple Timeframes

Praise for

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One GoodTrade

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Founded in 1807, John Wiley & Sons is the oldest independent publishingcompany in the United States. With offices in North America, Europe, Aus-tralia and Asia, Wiley is globally committed to developing and marketingprint and electronic products and services for our customers’ professionaland personal knowledge and understanding.

The Wiley Trading series features books by traders who have survivedthe market’s ever changing temperament and have prospered—some byreinventing systems, others by getting back to basics. Whether a novicetrader, professional or somewhere in-between, these books will providethe 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.

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http://www.WileyFinance.com


One GoodTrade

Inside the Highly Competitive

World of Proprietary Trading

MIKE BELLAFIORE

John Wiley & Sons, Inc.

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To my Mom and Dad for their unconditional love.

Copyright C© 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 inany form or by any means, electronic, mechanical, photocopying, recording, scanning, orotherwise, except as permitted under Section 107 or 108 of the 1976 United States CopyrightAct, without either the prior written permission of the Publisher, or authorization throughpayment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web atwww.copyright.com. Requests to the Publisher for permission should be addressed to thePermissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201)748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

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

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Wiley also publishes its books in a variety of electronic formats. Some content that appears inprint 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.B45 2010332.64–dc22

2010005945

Printed in the United States of America.

10 9 8 7 6 5 4 3 2 1

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Contents

Preface vii

Acknowledgments xi

PART I Inside a Prop Trading Firm 1

CHAPTER 1 These Guys Are Good 3

CHAPTER 2 One Good Trade 31

CHAPTER 3 A Good Fit 53

PART II Tools of Success 83

CHAPTER 4 Pyramid of Success 85

CHAPTER 5 Why Traders Fail 117

CHAPTER 6 Live to Play Another Day 141

PART III Getting Technical 163

CHAPTER 7 Stocks In Play 165

CHAPTER 8 Reading the Tape 193

CHAPTER 9 Maximizing Your Profitswith Scoring 223

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vi CONTENTS

PART IV The Trader’s Brain 249

CHAPTER 10 Trader Education 251

CHAPTER 11 The Best Teacher 285

CHAPTER 12 Adapt to the Markets 305

CHAPTER 13 The Successful Trader 335

Bibliography 339

About the Author 347

Index 349


Preface

A s the U.S. financial system neared the verge of collapse in the fall of2008, a 23-year-old prop trader I know was about to pocket $30,000for 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, oreven air conditioning. So what happened between 1998 and today? The In-ternet Boom and technical advances caused an explosion in proprietarytrading 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 withmy childhood friend, Steve Spencer. We started with nothing (not even aphone) and today our firm, SMB Capital, employs more than 60 traders.One Good Trade offers all the important lessons the market has taught meover the past 12 years in and around prop trading. I share these marketlessons while introducing a cast of characters, some of whom have suc-ceeded, and too many who have failed.

We will start with a look at traders to be emulated like MoneyMakerin Chapter 1, whose previous career as a professional golfer left him witha 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 learnwho gets hired (classic Joe Biden story enclosed), how we trade (dependson the market), how we find the stocks we trade (you are only as goodas the stocks you trade), our game-changing market fundamentals (OneGood Trade), and our superior trading skills (It’s called trading!). You willgarnish a savoring taste of what is really important to become a successfulprop trader.

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

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viii PREFACE

As the partner of a proprietary trading firm, I spend a great deal of mytime teaching. While I still trade actively, I am mostly a trading coach. WhatI 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 mistakesand those of other prop traders. A great trader is an elite performer. Eliteperformers spend every day trying to improve. Every day we trade is anopportunity to learn from the market. My mistakes and those of other proptraders are just gifts from the market for us to improve, and they will beshared so you can learn.

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

Too many traders do not know the stocks to trade and we will discusshow we find the Stocks In Play. Too many new and developing traderscannot 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 ex-plain the value a prop firm can offer and I spend a chapter answering hisquestion. I will debunk the myth that a new trader should seek out a super-star trader to learn best. Many new and developing traders could improvetheir P&L if they just understood how to “Score,” and we will illuminatethe importance of loss limits, ending a trading slump, and keeping excel-lent trading statistics.

A spot on a prop desk is a dream job for many people, yet they donot know how to succeed once they arrive. Bloomberg, CNBC, and Fox of-fer endless hours of professionals pontificating their opinions. Still, I knowof many new and developing traders overwhelmed with information andempty with ideas to improve. We will use an old teaching technique of thehead basketball coach at UCLA, John Wooden, to offer valuable sugges-tions in Chapter 4 (Pyramid of Success).

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

I have successfully navigated many different markets these past 12years of trading. I will share my journey with the trading set-ups that


Preface ix

worked best for each distinct trading period. Most importantly, I introducethe principle that has allowed me to profit in so many different markets: Iadapt.

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

For the developing traders who are underperforming and for those in-terested in becoming new traders in the future, this book was written foryou. The market has taught me the thousands of little things required tobecome successful. Many are undervalued by those who have not reachedtheir trading potential. Welcome inside the highly competitive world of pro-prietary trading. A funny, exciting, enthralling place only for elite perform-ers 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 thisbook. Traders are known for using nicknames around the office, and ouroffice is no exception.

Mike Bellafiore, BellaSteve SpencerGManJTomaRoy DavisAlexander JamesThe EnforcerFranchiseDr. MomentumMoneyMakerThe YipsterZ$ (ZMush, Mush, Mushy, and Z)G

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

MIKE BELLAFIORE

June 2010


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Acknowledgments

O ne Good Trade was a collaboration. It could not have been writ-ten without extensive contributions from the extraordinary team atWiley 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. Youare an extremely talented writer and good friend.

Thank you to my partners GMan, Gilbert Mendez, and Steve Spencerfor 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 tobuild the best equities training desk on the Street into our firm, SMB Capi-tal. What an incredible, exhausting, challenging, and rewarding life experi-ence 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 con-templated 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 bestpart of SMB will always be you, our traders.

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

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

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

Thank you to our interns for your help with research:

Monique YinKrysten Sciacca

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xii ACKNOWLEDGMENTS

Bradford ArlingtonGrant YangJoe BrummittPedro MachadoKurt Von WeisensteinAlex BeygelmanAlex SabharwalVishnu AnandPatrick TraynorPatrick DanielViolet WangBen KlixbullBrigitte TugendhaftSuccharita GaatJae HeoJay 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 yourkind 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 youto Tiffany Charbonier for assisting on this brilliant cover. Thank you toKevin Commins for finding me, giving me this opportunity, and steering methrough this rewarding experience.

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

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

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

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