Trade with a True Catalyst

08/28/2014 6:00 am EST

Focus: STRATEGIES

Michael Bellafiore

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

Veteran trader Mike Bellafiore of SMB Capital exposes the mistakes that new and retail traders often make when they don’t trade a stock with a true catalyst and highlights the two simple keys for traders to remember in order to avoid this pitfall.

Often new and retail traders do not trade stocks with a true catalyst. By a true catalyst, I mean an event that will cause significant new buying or selling. Said another way, price moving, buying, or selling.

The new trader and retail trader wonder: Why the heck is my stock not moving like I thought?  The answer may be because they do not have a true catalyst behind their trade.  And this may also explain why you so often get stopped out of positions.  The Flash Boys prey on trades in stocks without a true catalyst.

And then there are the garbage technical trades that too many new and retail traders make.

“The 8ma crosses over the 21ma, which corresponds with the Bollinger Bands under the shirt of the MACD.” (Is this a rapper?)

Have you ever backtested some of these technical trades?  I will save you some time.  They will not test profitable.  If your technical trade is not a wow then it is a pass.

You can correct this.

When our new traders first go live they trade stocks with changing fundamentals (a stock that has announced news that will change the fundamentals for the company for good or bad).  We have a whole list of news events that will change a company’s fundamentals.

So the question for the new and retail trader is: Are you in stocks with a true catalyst behind it?

  1. Is there new news that has changed the fundamentals about the company?

  1. Is this a truly significant technical level?

This will make your trading much easier and profitable.

By Mike Bellafiore of SMB Capital

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