What Do You Need First to Gain Trading Edge?

07/04/2014 6:00 am EST

Focus: STRATEGIES

Michael Bellafiore

Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading

If you’ve ever heard the expression “putting the cart before the horse,” you may understand why veteran trader Mike Bellafiore of SMB Capital stresses the importance of learning trading skill before even attempting to gain trading edge.

I have been listening to a great deal of the Toddler music channel on Pandora so pardon my lyrics.


First comes skill
Trading Skill!
Next comes edge
Trading Edge!
Then comes trading profits in your head
…And in your bank!

Our firm has edge during Russell imbalances.  I was discussing this strategy in theory with our college training class, exposing them to the different ways traders can find an edge in markets. 

One very ambitious student from China asked, “How do they do it?”

This is a perfectly acceptable question. 

Or is it?

I didn’t develop this strategy so I cannot share it.  It’s not mine to share.  Traders who sit on our desk eventually learn it from other traders after they have developed trading skill…

After they have developed trading skill!

Their trading skill allows them to understand, execute, and manage these inefficiency opportunities.

But even if I did share it, it wouldn’t help that ambitious student.  He/she doesn’t know how to trade yet.  Learning an edge without trading skill is closer to dangerous than profitable.

Most trading edges are very small.  Some say great traders are right perhaps slightly over 50%.  They know when they are right.  They get big when they see it.  They exit when the trades are not worth risk.  Yes they have edge but it’s their trading skills that allow them to capitalize on this edge.

First comes skill.
Then you can find edge.
Then comes profits.

By Mike Bellafiore of SMB Capital

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