A VIEW FROM THE TRADING FIRMS
Mike Bellafiore is a partner at SMB Capital, a proprietary trading firm in New York City that specializes in the short-term trading of individual equities. He is also a successful trader and a mentor of traders within the firm. Most recently, SMB has extended its training to the trading public via a blog and a formal trading curriculum. I had the pleasure of visiting SMB Capital and was impressed by Mike, Steve Spencer, and the others in the firm. There was a good buzz on the trading floor throughout the day as traders shared ideas and breaking developments.
Larry Fisher is a co-owner of Trading RM, a proprietary trading firm in Chicago that specializes in trading individual stocks and options on those stocks. Larry and his partner Reid Valfer started the firm with the desire of providing a mentoring and teaching environment for traders. An unusual feature of the firm is that Larry and Reid call out all their trades, illustrating to their traders what theyre doing throughout the day. Teaching and mentorship are thus woven into the fabric of daily trading. In visiting Trading RM, I was impressed by the learning environment. Larry and Reid have developed a web site and blog so that they can share their insights with the trading public.
It is typical of Mike that, when I asked him for the three things that most help his self-coaching, he emailed me a 14-page document. He is attuned to the mentoring process and practices it in his own trading. Number one on his list is keeping trading statistics. Statistics are very important for my trading, Mike explains. I must know what trading plays are working best for me, what stocks I am trading profitably, my win rate, my liquidity stats, etc.
The head trader at SMB, Gilbert Mendez (GMan) created a tool for the desk called the SMB Chop Tracker. It summarizes trading statistics each day for each trader, so that they can see how well theyre doing and where their profits and losses are coming from. Most often I struggle with my trading because I am in the wrong stocks, Mike Bellafiore notes. He tells the story of how he traded one particular stock, MBI, quite well in the fall and then consistently lost money in it. I felt like someone else was inhabiting my trading body, he jokes. So I looked at my stats. They were screaming, Hey, Mike, maybe another stock for you? I figured out some adjustments I could make, concluded there were better stocks for me to trade, and decided to move on. I went right back to making money.
Statistics on our trading alerts us to hidden patterns, both problems and solutions.
Mike also tells about a particularly vicious loss he took in trading SNDK. I will always remember 11/21/05, he recalls. What a bloodbath. For weeks I walked around cussing SNDK underneath my breath and swore to never trade it again. But one day I checked my statistics and surprisingly learned that I actually traded SNDK well, save that one day. I was overvaluing that last rip. While trading, you develop a perception of how well you are trading a stock. That perception can be incorrect. When you study your trading statistics, you may discover that the stocks you thought you were killing, you werent. And you may discover that the stocks you thought were a disaster werent.
Mike Bellafiores second coaching practice is something we all do, but not with intention: breathe. While trading, it is essential to quiet your mind so that you accurately process the data that the market offers, he observes. Some traders think they just need to focus better and shut out unneeded stimuli. These traders believe they can will themselves to focus better. But quieting your mind is an acquired skill. Mariano Rivera [a fastball pitcher] cant just start throwing a changeup because he really wants to. He would have to spend hundreds of hours working on his grip, motion, and control. It takes 15 to 30 minutes of deep breathing a day to develop and maintain this skill. My partner and co-founder of SMB Capital, Steve Spencer, taught me how to properly breathe. Steve teaches this to our new traders on our prop desk. I used to think I accurately processed the data that the market offered. But after I learned how to properly breathe, I recognized that this was not accurate . . . You must develop the skill of quieting your mind so that you accurately process your market data and, as a result, fulfill your trading potential.
Mike tells the story of a young trader next to him who cheered whenever his stocks moved in his favor. The veteran traders merely smirked; that trader soon blew up. For old-school traders like us, he points out, there is no celebrating intraday. You are now rooting for your stocks and not just interpreting the data that the market is offering. By controlling his breathing, he is better able to let the market data come to him, improving his decision-making.
If youre celebrating or bemoaning a trade while youre in it, youre not focused on the market itself.
Mike Bellafiores third self-coaching best practice is watching his trading tapes. Watching my trading tapes has improved my trading more than any other self-improvement technique, he asserts. Many great athletes such as Alex Rodriguez use video to improve their performance. I record all my trades and watch back the important plays. Doing so has helped me particularly with my two biggest weaknesses: closing out a winning position prematurely, and adding size. By watching tapes of his trading, Mike developed rules for recognizing when he should hold positions, when he should get back into a position he has exited, and when he should get out of positions. These rules were compiled into lists that became his system. It gave me the confidence to add size when I see a great risk/reward opportunity that is on my list, he explains. I learned from my trading tapes that adding size in certain spots offered favorable risk/reward trading opportunities, and that perhaps it was even irresponsible to not add size with certain trades. So when I spot a trade from my list of When to Add Size, I just execute.
Once again, self-coaching boils down to directed, hard work. In my trading space, Mike insists, if you are not willing to come into the office on the weekends and/or find some time after the close to watch your trading tapes, then you are not competing as a trader. Trading is a sport. Its a competition. And the results of your trading are often determined by the effort you put in before the open.
Larry Fishers responses to the question of the three self-coaching practices that have most aided his trading reflect his teaching practices at his firm, which in turn reflect his years of trading experience. Heres what he has to say:
Writing a Trading Journal
Over the years, I have used a journal as a medium to make sure that I am in tune with my emotions, Larry explains. The journaling process has become a very important part of my trading routine. I have realized that writing in my journal pays huge dividends, especially when I am trading well and I am trading poorly. The process keeps me grounded, while often limiting the duration of trading slumps and extending periods of trading successes. Notice that Larry employs the journal effectively both when hes trading well and when hes not. This keeps him attuned to emotions in a positive wayit grounds him in confident trading when hes seeing markets welland it enables him to take corrective action quickly when hes not in tune with the stocks hes trading. So often the difference between the successful trader and the unsuccessful one is how they handle being very right and very wrong. The journal, properly constructed, can be a tool for adjusting to these extremes, enabling you to add risk when youre trading well and pull back when youre not.
The trading journal is a means for sustaining self-observation.
Communicating with Peers
Larry Fisher notes, I have a network of friends and colleagues with whom I make an effort to communicate on a regular basis. This allows me to learn from others while sharing real-time market experiences. These conversations aid me in dealing with the ebb and flow associated with being a professional trader. This theme arises again and again with the best traders: they have a rich network of contacts that help them personally and professionally. Larrys observation echoes what we heard from Ray Barros: there is always an ebb and flow to trading; profitable times and lean times. Being able to connect with traders who have been through the cycles and know how to move beyond them can be a tremendous support. We also underestimate the power of social interaction as a means of cognition: some of us simply think more effectively when we think aloud. Sounding boards for our ideas helps us hone our market views and make better decisions.
Trading in a Good Environment
In order for me to be able to coach myself, Larry explains, I need to trade in an environment that is conducive for success. We built our firm with that in mind. All the traders at my firm are on the same page. Willingness to be a part of a team combined with the desire to learn are characteristics each trader possesses. I have visited many firms in which traders operate in almost total isolation of one another. One persons learning experiences become just that: opportunities to learn for that individual alone. When a firm is founded upon a team concept, everyones learning becomes learning for the group. This is Larry Fishers central insight, and it is the greatest strength of his firm. When everyone calls out her trades, theres no place to hide. That is tremendously freeing. You can learn from the successes of your peers and also from their mistakes. Their ideas spark yours, and your heads-up on news or breakouts aids everyone else. In an environment in which all traders are their own coaches, all traders inevitably contribute to each others coaching.
Learning cannot occur without accountability.
These are the real words of real traders who really trade for a living and really run successful trading firms. Their best practices can become your own, even if you dont work for SMB Capital or Trading RM. How do your trading practices compare with those at these firms? How does your trading atmosphere compare with theirs? When youre coaching yourself, you arein a sensecreating your own trading firm. You are coach, risk manager, researcher, and trader rolled into one. How well you fulfill these roles depends on the time and effort you devote to each. A world-class basketball player works on offense and defense; on passing, dribbling, shooting, rebounding, and physical conditioning. There are many facets to ones gamein sports and in trading. The successful firms pay attention to all of them.
Mike and his partner Steve are correct to emphasize breathing in their training of traders. This exercise makes a worthwhile assignment for your development. The first step toward controlling emotional and cognitive arousal is controlling the level of arousal in the body. When we are filled with stresses and worries, we bring those to markets. When we sustain a quiet mind, we let markets come to us and free our minds to respond to the patterns we perceive. Write in journals, communicate with peers, and consult your trading statistics. These actions are all ways to make sense of your market experience so that you can then sit in front of the screen with a quiet, confident mind. It does take dedicated time each day to sustain the quiet mind, but it comes more easily with experience. Find a room with no distractionsno noiseand keep yourself totally still as you fix your attention on something in the room: an object on the wall, music in headphones, etc. Then breathe very deeply and slowly, keeping your attention as fixed as possible. Youll find yourself able to tune out fear and greed, anxiety and overconfidence as you sustain a high level of concentration and fix your attention on an emotionally neutral stimulus. The best trading practices and environments cannot benefit you if you are not in a state to make good use of them. Quite literally, with each breath, you can be coaching yourself.
I have found that if I start my day with physical exercise and biofeedback, I can sustain calm concentration as an effective strategy for maximizing my energy and focus. If you start your day run down and distracted, youre likely to become even more fatigued and scattered during the trading day. Part of preparation is to study the market; part is also to keep yourself in a physical and cognitive mode that maximizes performance.