7 Fundamental Traits of Good Traders

03/09/2012 3:00 pm EST

Focus: TRADING

Michael Bellafiore

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

Even rookie traders can build a strong track record if they adhere to a well-thought-out plan, says Mike Bellafiore, who names the seven core facets he teaches developing prop traders.

Michael Bellafiore is my guest, and Michael, I understand that you’ve developed a general manager test for traders. Tell me about it.

A lot of people want to land a spot on a proprietary trading desk; that’s a goal for people. I ask them to think about something. 

If I were the general manager (GM) of the New York Knicks, and you came to me and you said “You know what, I’m in college and I’m playing a little pickup basketball and my team won the college championship. I lift a little bit of weight, and I’m watching my diet, and I think I’m actually getting pretty good at this. I would like for you to draft me in the first round.” The general manager would think you’re crazy.

But, in trading, this happens all the time. People come in front of people like myself and they say, “I think I like this game called trading. I can’t get my eyes off of CNBC, I read the Wall Street Journal, but I’ve never really traded live. I have no results to show you.”

If you get drafted in the first round by the New York Knicks, the Knicks can look at how you did in high school, they can watch how you played at AAU, they can watch how you played in college, they’re going to bring you in and do very specific tests on your body fat and your shooting, and they will have reams of data about how good you can be at that sport.

But in trading, too many times, new and developing traders don’t have that and expect a lot.

I think you ought to go and develop a track record—whether it’s paper trading or with a small account—so that you can build a really strong argument when you talk to somebody like me or other people like me as to why we ought to invest a lot of time and energy into you.

How do you develop a trading plan?

For us, we call it “one good trade.” I wrote a book called One Good Trade, and in it, there are seven fundamentals that actually go into each trade.

As long as our traders have thought of the seven fundamentals, whether they made money or whether they lost money, we’re not really that concerned. Is the process that they went through fundamentally sound?

Just give me a quick picture of the seven fundamentals.

  1. Proper preparation is that you know enough about a particular stock
  2. Discipline: What was your plan, and did you actually stick to your plan?
  3. Execution: Did you actually execute?
  4. Patience: Did you buy the stock at the price you wanted to?
  5. Did you have a detailed plan for the particular trade?
  6. Communication: If you’re on a desk did you communicate it to other people?
  7. Review: Did you go through and actually review that trade so you get better at it?

So you want to plan a trade and then trade a plan. I understand how discipline is the toughest part, isn’t it?

It can be for some people, and again, we talked about this. The market puts a big mirror up on the things that you need to work on as a person.

I had a conversation with somebody who was an incredibly bright young trader. He was struggling with discipline. He came into my office and he said “How do I actually get more disciplined in my trading?” and I fired back to him and said “Well, how do you think that you become more disciplined in your trading?”

My job is actually to get them to understand the right answers. It’s not to give them the right answers; it doesn’t help anyone if I give them the answers and it doesn’t make sense to them.

He then started to answer, and said, “Well, you know, I’m not working out consistently in my life, I’m not eating consistently healthy in my life; maybe I should start there.” I said yes, that’s right.

Very interesting; it’s almost like if you give a man a fish, he eats for a day; but teach him to fish, and he eats for the rest of his life.

I think that’s really important. I think that what we’re trying to do is guide people to find out how good they can be.

The question I want people to answer if they go through our training is how good you can be. That’s a personal journey for them.

I don’t have all the answers. I have the questions that they should be asking themselves. I know the work that they need to do for them to find out how good they can be, but it’s their journey.

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