The First Steps to Trading Success

08/26/2011 10:57 am EST

Focus: STRATEGIES

Michael Bellafiore

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

Becoming familiar with a chart pattern is step one, says Mike Bellafiore, but from there, traders continue on a journey where they must always learn, adjust, and strive to hone their craft.

As a trader, and especially as a new trader, there are thousands of courses you can take and thousands of books you can read to gain that knowledge, but how do you also gain skills that you need to trade? 

Our guest today is Mike Bellafiore, here to talk about that. So Mike, what do you mean by the differences between just knowledge of the markets and actual trading skill?

I was actually just having breakfast with Corey Rosenbloom and we were talking a long time about this.

Corey will come and he’ll give a presentation about a particular pattern, or I’ll come and I’ll give a presentation about a particular pattern; let’s just call it a flag pattern, a technical flag pattern, which a lot of people know. 

People will sit there in the audience and they will listen, and I’m sure they will be highly entertained and they will sprinkle in some nice stories. 

Now, what they’ve gained is domain knowledge. They’ve learned a set-up, but that’s just the beginning of the learning.

You can’t walk out of the presentation that I give and start shooting away on your TD Ameritrade account and think that you’re going to be able to retire to a Caribbean country in a couple of months. That’s not going to happen. 

You have to add intrinsic motivation, which means you’re going to have to stay late and do a lot of practice. 

You have to add critical feedback. There’s a great book, Bounce, from a really top-level ping pong player who studied how people became great at things. He couldn’t actually find really terrific examples of people who were elite performers, which is what traders are. They are elite performers disguised as traders who didn’t have excellent coaching. 

You have your coach K’s for a reason. You have your Bobby Knights for a reason. You have your Rick Carlisles for a reason.

You have to add also purposeful practice to that, and Gladwell wrote a little bit about that, and Dan Coyle writes about that. Anders Eriksson is really the grandfather of all of that. That’s really how you become great at anything. 

I know that traders have an easy time seeing the pattern after the fact. Of course, everybody sees a beautiful head-and-shoulders or flag pattern (after the fact). The tough part, of course, is reading the right side of the chart before it prints. 

Is there anything you can do to kind of take that knowledge of knowing what that pattern looks like, but see it while it’s happening?

No, there isn’t. That’s what I mean. You learn the pattern; that’s the main knowledge. Then you actually have to go through the learning curve. You’ve got to put your time in. You’ve got to practice. 

What happens when you practice the right way is that you’re gaining intuition. I talk about something called “combinatorial explosion.” I talked about a simple flag pattern; every flag pattern is different because there are a thousand variables that are going into each trade. 

How do you tweak each flag pattern? How do you really know when to size up in it? You can’t trade every flag pattern the same. That makes no sense. What about a flag pattern when the market is exploding to the upside versus a flag pattern when the market is exploding to the downside? And that’s just one variable. You have to treat that completely differently. 

What you really need to do is practice in the right way. You’re going to build intuition so that when you’re trading, you actually know how to make the adjustments. 

Interview Continues on Page 2

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For an experienced trader, a lot of times you can’t even verbalize that. We’ll sit and talk with our traders, we’ll watch film back of a particular trade, and I’ll be like, “You really needed to short that stock at the top of the range, not the bottom.” Why? I’m not really sure. I’ve been doing this for a long period of time and I just know that’s the real thing to do.

I know you’re a big proponent of video taping all of your trades so that you can go back and look, almost like a football player does. Is that what you mean by “practicing right?”

That’s one of the things you can do to practice, but you can journal, you can talk to other traders, you can talk to your mentor, you can watch film back yourself, you can watch film back in a group.  You can create your own study gaggles of people to talk through trades. 

See related: The Right Way to Journal Your Trades

We’re doing something interesting right now: we’re building something called the S&E playbook. Guys will send me a trade that’s their best trade from the day, and they document it in a template form. They send it to us and we put it into our training program in this section, and you can get more reps that way. You can watch your trade, her trade, his trade, and we can get a lot better at that flag pattern.

It sounds like you’ve really put a very objective way to achieve these steps. It sounds like you can make it.  It’s not some nebulous thing that someday it will just click for you. There are steps to take.

No, there are. The problem is that…to be clear, most people are never going to take those steps. Those people are never really going to commit to really creating a craft.

LeBron James, as much as he’s physically talented, still has put in a lot of work. Kobe Bryant, there’s a great attitude about him, about how he wasn’t satisfied with a particular game and he spent three hours shooting at a road site, and the security guards are like, “Can we go home?” 

There really is a code for a trader—and I talk about this a lot—to become better. The question is do you have the intrinsic motivation? Do you have the ability to sustain your energy to do that every day over eight months so that you can build a playbook and build intuition to be able to consistently make money in the markets?

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