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Mike Bellafiore: Eight trading lessons from a proprietary trading desk

By Mike Bellafiore, co-founder of SMB Capital and SMB|U

As a partner at a prop trading firm in NYC, I have the privilege of watching many traders become high-performing traders. I see how and why they succeed. I know their obstacles, and together we push past them. It’s like having a floor seat to watching them grow. Along the way, these traders teach me and our trading community important lessons.

At February’s 2017 TradersExpo in NYC, I shared eight lessons from our prop desk. Today I will share them with you.

  1. Find a trading niche that has edge and leverages your personality and cognitive strengths. Dr. Steenbarger is the most thoughtful voice in the trading community advocating for traders to match their trading system with their talents. The best example from our desk is SWang, who almost exclusively scalps. He tries to capture 10 to 50 cents in trades, over and over again. His ability to process information quickly is unique. Sticking to scalping (now with large size, as he has grown as a trader) allows him to play to his strengths and be a distinct trader.

  1. Go where the big players cannot play. My partner, Steve Spencer, wrote an illuminating piece, The End of Volatility, on trading solutions for underperforming traders in this period of historically low volatility. One such solution was to play in markets where the biggest players cannot. LIKE WHERE? EXAMPLE? We do some of that at our firm. One rising SMB Trader, I call him “Nadal”, has made this his focus and significantly improved his profit and loss (PnL).

  2. When your trades visit, you must trade them big! Our most improved trader in 2016 would make his month in only a few trades. He would scratch and scratch and lose and lose. And then … BAM! He would catch his favorite setup with massive size. Know your favorite setup, internalize it through study, develop a risk system for when it arrives—and then “let your hands go” and get big when you spot it.

  3. Develop a growth mindset. The most successful trader on our desk, Shark, has a growth mindset. A growth mindset is the belief that you can improve your skill, and thus results, from where you are at today. Carol Dweck, author of Mindset, compares this with the fixed mindset, in which a person believes he can only be as good as his talent dictates. Everyday he works to improve his trading, even after becoming a seven-figure trader. He works on technology, new strategies, new ways to express edge, automated models, and tamping down dangerous periods of over-confidence.

  4. Optimism improves your chances to capture trading opportunity. The Chief, Seth Freudberg, who runs our options trading desk (powered by The Kershner Trading Group), is someone I respect as much as anyone in the trading space. He effectively lost his job as the CEO of a publicly-traded insurance company when it was acquired. Instead of wallowing in disappointment, he used it as an opportunity to see a bigger and better opportunity — to pursue his trading passion. As Martin Seligman teaches in Learned Optimism, performance increases when we view what happens to us through an optimistic lens. Today, The Chief runs a successful desk of 15 options traders for our firm—doing what he loves.

  5. Automated not discretionary trading may be the best way for you to attack markets. One of our top traders focuses on using his talents to code and build models. Prior to that, he was a discretionary trader who mostly just tread water. Shifting his focus on how he attacks markets made all the difference. Now he is building out his automated trading team, running a series of profitable automated models and our head quant in NYC.

  6. Keep score of your trading diligently. One of my favorite traders, Frequent Flyer, asked for more buying power on his favorite strategy. Before he started his argument, my inner voice said, ”Why does he want to focus on this trade?” But I listened to him before speaking, and that was smart! Frequent Flyer dumped a bunch of data on our conference room table — irrefutable evidence deserving a capital bump, given his trading stats for this trade. His equity curve for this strategy was gorgeous. We immediately approved the increase in risk.

  7. Trade more consistently with a report card for scoring your daily routine/process. Cool Hand RMac wanted to take his trading to the next level. In his daily reviews with me, you could sense his stress about PnL. We asked him to take a step back and focus on all the things necessary to improve, to score his day based on whether he completed his process/routine rather than being hyper-focused on PnL. He developed a report card on process that he uses to judge each day. Early progress has been encouraging.

I hope some of these lessons will help you improve your trading.

As always, please feel free to reach out and ask anything about your trading — mbellafiore@smbcap.com.

*no relevant positions

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