Table of Contents Title Page Dedication Copyright Page Preface CAST OF CHARACTERS Acknowledgments PART I - Inside a Prop Trading Firm CHAPTER - These Guys Are Good WELCOME TO THE WORLD OF PROPRIETARY TRADING A FIRM’S GREATEST ASSET: ITS TRADERS BUILD FROM YOUR POSITIVE BASE CHAPTER - One Good Trade DEFINING A BAD SALE YOU ARE A TRADER, NOT AN INVESTOR THE FUNDAMENTALS PROPER PREPARATION HARD WORK PATIENCE A DETAILED PLAN BEFORE EVERY TRADE DISCIPLINE COMMUNICATION REPLAYING IMPORTANT TRADES MONEYMAKER’S ONE GOOD TRADE CHAPTER - A Good Fit WHO GETS HIRED? A RECRUITMENT PROCESS CAN A FIRM ALWAYS SPOT THE NEXT GREAT TRADER? THE PROS AND CONS OF RECRUITING EXPERIENCED TRADERS A GOOD FIT FOR THE TRADER A GOOD HOME PART II - Tools of Success CHAPTER - Pyramid of Success FIRST, BE UNORIGINAL SURVIVE THE LEARNING CURVE FOCUS ON IMPROVING EVERY DAY ASK THOUGHTFUL QUESTIONS TALK SHOP DEVELOP A DAILY WORK PLAN BOUNCE BACK FROM DEFEAT ELIMINATE YOUR MISTAKES RESPECT THE MARKETS MASTER BASIC TRADING PLAYS LEARN TO EXECUTE ORDERS QUICKLY FINE-TUNE YOUR FOCUS CONTROL YOUR EMOTIONS THE GOOD NEWS CHAPTER - Why Traders Fail THEY DON’T LISTEN TO THE MARKET THEY DON’T LOVE TRADING THEY CAN’T HIT STOCKS THAT TRADE AGAINST THEM Smiley: Smiling Back to Hong Kong THEY HAVE UNREALISTIC EXPECTATIONS THEY’D RATHER BE RIGHT THAN MAKE MONEY DON’T FORGET: YOU’RE A TRADER, NOT AN INVESTOR CHAPTER - Live to Play Another Day JTOMA: FROM THE ABYSS TO CNBC DON’T FOCUS ON MAKING PREDICTIONS YOU MUST BELIEVE STOPPING YOURSELF OUT (GETTING FIRED) STARTING TOO QUICKLY NOT EVERYONE GETS INTO AUGUSTA PART III - Getting Technical CHAPTER - Stocks In Play WHAT IS A STOCK IN PLAY? WHAT IS A GOOD INTRADAY STOCK? WHY TRADE STOCKS IN PLAY? THE IMPORTANCE OF PICKING THE RIGHT STOCKS BLACK BOX ALGORITHMS ARE NOTHING TO FEAR SHORTENING THE LEARNING CURVE FINDING STOCKS IN PLAY CHAPTER - Reading the Tape THE TAPE TALKS TO YOU I HAVE A DREAM A RIP SAVED COMBAT HIGH FREQUENCY TRADING READING THE TAPE 101 PUTTING MORE TRADING PLAYS IN YOUR QUIVER WHEN AND WHERE TO “LOAD UP” AND STILL LIMIT YOUR RISK A LOVE AFFAIR WITH CHARTS HOW DO I READ THE TAPE? CHAPTER - Maximizing Your Profits with Scoring SETTING YOUR MAXIMUM INTRADAY TRADING LOSS TRADING BASED UPON THE TIME OF DAY CONSISTENCY PROPER SIZING WHY COMPARISONS CAN BE HARMFUL BE MENTALLY AGILE STAY WITH IT IT MAY TAKE TIME TO GET ON THE RIGHT SIDE OF A TRADE DEVELOPING IF-THEN STATEMENTS KNOWING YOUR BEST TRADING PLAYS HOW TO END A TRADING SLUMP THE CHEETAH AND THE TRADER PART IV - The Trader’s Brain CHAPTER 10 - Trader Education USING VIDEO TO REVIEW TRADES PRACTICING TECHNIQUES FROM TOP TRADING PSYCHOLOGISTS MENTORING LEARNING FROM TRADERS ON THE DESK AND YES, WE DO HAVE DEEPER POCKETS ENFORCING TRADING RULES THE BANTER ON THE PROP DESK COMPILING TRADER STATISTICS SECRET PROJECT X: FINDING CUTTING-EDGE WAYS TO TRAIN TRADERS BETTER CHAPTER 11 - The Best Teacher NEVER SATISFIED HIGHLY MOTIVATED COMMUNICATE CLEARLY BUILDS ON A FIRM FOUNDATION YOU SAY TOMATO, I SAY TOMAHTO LOOKS INWARD PRACTICES PATIENCE GETS TOUGH SACRIFICES SET FIRM VALUES CHAPTER 12 - Adapt to the Markets THE ASIAN FINANCIAL CRISIS THE INTERNET BOOM THE BOUNCES OF 2001 9/11 A BEARISH CYCLE IN THE EARLY 2000S THE SPREAD OF THE PENNY THEN CAME HYBRID THE UPTRENDING MARKET THE HOUSING CRISIS THE PRICES OF OIL AND GAS SKYROCKET THE NEAR COLLAPSE OF THE U.S FINANCIAL INDUSTRY ETFS EXPLODE IN POPULARITY TRADES2HOLD CHAPTER 13 - The Successful Trader Bibliography About the Author Index Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future For a list of available titles, visit our Web site at www.WileyFinance.com About the Author Mike Bellafiore is a co-founder of SMB Capital, a proprietary trading firm in New York City He is a regular contributor to thestreet.com’s RealMoney He has written numerous articles for SFO magazine His trading strategies have been featured in Brett Steenbarger’s book, The Daily Trading Coach He is a regular contributor to the SMB Blog, which provides market stories and trading advice He hosts SMB University on StockTwits TV He is a graduate of the University of Connecticut School of Law and a former member of the University of Connecticut Board of Trustees He currently resides in New York City Index Adaptation to the market 9/11 impact 2001 market bounce about Asian financial crisis bearish cycle ETFs explosion financial industry troubles housing crisis hybrid trading internet boom next trade focus oil and gas prices penny spread scalping Trades2Hold trading plays portfolio uptrending market Algorithmic programs Amaranth example Ambition Amen Corner example Appreciation of reading the tape Asian financial crisis Baby steps Bailouts Basic foundation from teachers Bearish cycle about fade trade negative influences, reduction in saving money Belief and survival Buying in front of support Buying on pullbacks Central banks Challenges from teachers Chart climber (trader) Charts vs reading the tape Chops See profitable trades CNBC Cockiness in lieu of capability Commitment Communication Competitive personality Confirmation bias Consistency Consistently profitable trader (CPT) Continuous improvement in teachers and teaching Continuous learning Correctness need Culture Culture, organizational Daily improvement Daily learning schedule Daily work plan Day trading Decision-making responsibility Deep pockets aiding trader education Deliberate practice Demo practice Desk traders, education from Andrew (trader) (patience) by GMan (trader) (use of) from KW (trader) (seeking out) from Playmaker (trader) (position size) from Scorsese (trader) (momentum trading and speed) from Steve Spencer (commitment) by TBW (TBoone Wannabe) (trader) (use of) from Zi (trader) (severe discipline) Development concentration Discipline Doubling down Dr Momentum (trader) Draw cuts Draw downs Earnings level Earnings questions Earnings stocks Earnings vs profits EKA (trader) Emotion control Emotions ETFs explosion Execution speed Execution vs profit and losses Experienced traders Fade trade Failure rate Failures about correctness need hitting stocks Hollywood as learning opportunities market listening Mayor (trader) reasons for trading, love of trading vs investing unrealistic expectations Faith in student traders Favorite (trader) Fear of black box algorithms Financial industry troubles Finding one’s right size Finding stocks in play Fit about experienced traders and as a good home hiring decision identification of and recruiting recruitment process for the trader Focus on prediction on process on profit and loss Fundamentals Getting back to basics Getting fired on Day lack of practice late arrivals Getting on the right side of a trade GMan (trader) Going big and going home Good intraday stocks Good trades vs profitable trades Hard work Harmful comparisons Held bids High frequency trading avoidance about algorithmic trading elimination and AMZ’s Hiring criteria Hiring decision chosen few and fit persuasive individuals Hitting stocks Hitting the stock Housing crisis How the tape talks AAPL and Steve Job’s Health about Brown Brad (trader) and thinking like a trader How to read the tape See reading the tape Hybrid trading Identification of fit about outliers Psycho (trader) Tickster (trader) If-then statements Importance of being in the right stocks Importance of picking the right ones Important intraday levels Improvements to trader education Information overload Information sharing Intelligence Internet boom Internship program Interview questions Intraday loss setting Intraday lows Investing vs trading Inward looking behavior JToma (trader) JToma Review Lack of practice Late arrivals Late summer trading Lateness League of lesser firms Learning curve Learning environment Learning opportunity, loss of Lesson101 in reading the tape Listening skills Loading the boat Loading up with risk limitations Loss limits Losses exposure to size of Lost opportunity costs Market as performance review Market changes Market listening about Boy Genius (trader) high degree of Trent (trader) Market respect about Amaranth example execution speed Skippy (trader) SNDK ripper example trading plan mastery Market response to focus on prediction Mendez, Gilbert See GMan (trader) Mental agility about Amen Corner example effects of vs news feeds and charts trading both sides Mental preparation Mental toughness Mentoring Dr Momentum (trader) using GMan (trader) and newbies and trader education Mentors Midday rules Midday trading danger Mistake reduction Mistakes Momentum trading and speed MoneyMaker (trader) Motivation of teachers Mr Discipline (trader) Multiple time frames Negative influences Negativity Newbies News feeds and charts vs mental agility Next trade focus 9/11 impact] Oil and gas prices On-tilt trading Opening trading Opportunity in day trading Opportunity to learn, failure as Order execution improvement Organizational culture Outliers Paper trading Patience Penny spread Percentage returns in day trading Performance review, market as Physical preparation Poaching Position size Positive base Practice as part of trader education Practice routine Premarket routine Preparation, mental and physical Price action of market Process focus Profit and losses vs execution focus on Profit variability Profitability Profitable trades Profitable trades vs good trades Profits vs earnings Prop desk banter Proper preparation Proper sizing Proprietary trading firm funding of nature of working conditions Psychological hurdles Psychological needs Reading the tape about appreciation of being saved from rips through vs charts confirmation bias high frequency trading avoidance how the tape talks how to lesson101 in loading up with risk limitations trading play development and collection Reasons to trade Reasons to trade stocks in play about consistency earnings stocks late summer trading loading the boat opportunity in day trading percentage returns in day trading Recordkeeping Recruiting Recruiting matrix Recruitment process about earnings questions essay exam interview during Penny (trader) interview resumes Rejection Resilience Resumes Rips See also losses Risk/reward position Risk-taking behavior Sacrifices made by teachers Saving money Scaling Scalping Scoring about consistency getting back to basics getting on the right side of a trade harmful comparisons if-then statements, developing intraday loss setting mental agility proper sizing staying the course trading based on time of day trading plans, personal trading slump exit Severe discipline Shop talk Short squeezes Short terming the learning curve Shrinkage (trader) Simulation of trading Single stock bounce Skippy (trader) SMB Capital SMB Chop Tracker SNDK ripper example Social networking Spencer, Steve Sprinter Starting too quickly Staying the course Stock picking the wrong stocks Stocks In Play about defined fear of black box algorithms finding good intraday stocks importance of picking the right ones reasons to trade short terming the learning curve superior trading skills Stopped out (condition) Success pyramid about daily improvement emotion control learning curve market changes market respect mistake reduction resilience shop talk thoughtful questions unoriginality work plan, daily Successful trader Superior trading skills Superstars as teachers and teaching Support plays Survival about belief and cockiness in lieu of capability focus on prediction and getting fired starting too quickly trader quality Tape reading See reading the tape Teachers and teaching basic foundation from challenges from chart climber (trader) communication of continuous improvement in inward looking motivation of patience sacrifices made by superstars as traders used for values set by Thinking like a trader Thoughtful questions Ticking time bomb Time usage Toughness, mental and emotional Toyota example Trader education about deep pockets aiding improvements to mental preparation mentoring opening trading practice as part of prop desk banter trader statistics compilation from traders on the desk trading rules enforcement video use Trader quality Traders background of character of on the desk fit good for used for teachers and teaching Trades questions regarding replaying important Trades2Hold Trading based on time of day as a craft vs investing love of trading plans before Trading blogs Trading both sides Trading ideas Trading journal contents of daily entries in emotions recorded in Franchise (trader) lack of pros and cons of actions/techniques trading simulations Trading plan mastery Trading plans importance of One Good Trade steps personal before trading Trading plays Trading psychology Trading records Trading rules enforcement Trading skill development Trading slump exit Trading style Trading videos Training See also teachers and teaching emphasis on if-then statements types of Training class Training program 2001 market bounce about how to play single stock bounce Unoriginality Uptrending market Value setting Values set by teachers and teaching about as continuous learner faith in student by work-to-profit ratio Video use for all traders order execution improvement position size in trader education Visualization exercises Win rate Work ethic Work plan Working conditions Work-to-profit ratio Z$ (trader) This section was adapted (www.smbtraining.com/blog) from a June 14, 2009, posting on Bella’s Blogs from a July 25, 2009, posting at Bella’s Blogs posting on Bella’s Blogs This section was adapted (www.smbtraining.com/blog) This section was adapted (www.smbtraining.com/blog) from an October 13, 2008, This section was adapted (www.smbtraining.com/blog) from a June from an April from a 19, 2009, posting on Steve’s Blogs 9, 2009, posting on Bella’s Blogs 30, 2009, posting at Bella’s Blogs 2, 2009, posting at Bella’s Blogs 12, 2009, posting JToma’s Blogs This section was adapted (www.smbtraining.com/blog) This section was adapted (www.smbtraining.com/blog) April This section was adapted (www.smbtraining.com/blog) from a May This section was adapted (www.smbtraining.com/blog) from a May at ... we think One Good Trade, and then One Good Trade, and then One Good Trade We judge each of our trades based upon whether we have followed seven fundamentals that compromise One Good Trade I have... Then make One Good Trade and then One Good Trade and then One Good Trade All good traders have had thoughts that they’re at the end, they’ll never make money again, or that the market is just... percentage of our winnings WELCOME TO THE WORLD OF PROPRIETARY TRADING Proprietary trading (or “prop trading for short) is done for the benefit of the company’s partners and employees only, not for the