Mike Bellafiore discusses RKDA and mostly SIG in our 11AM mentoring session today. Mike discusses the “moment in time” when you could have placed an excellent risk/reward trade in SIG. We hope these video reviews from our training room, help you improve as at trader.
Riding into work today, I reviewed The Daily Report Card of a developing trader with this month’s goal of sizing. Some might read her trade review and wonder: Is she making too many trade decisions?
Often you hear traders lament they need to hold their winners longer. Or traders carp they should have given a trade a bigger stop. As an active trading trading coach, I generally prefer a different approach for consistent trading.
I notice much better odds for active trading success when traders are able to make more decisions and still stay in the real trade. Traders who can cut trades not as likely to work based on what they are seeing in markets. Traders who can get out of a trade and then back in, after noticing the trade more likely to work. Traders with the openmindedness and nimbleness to change their minds quickly about risk on and risk off.
This trader wrote (highlighted most important comments relative to this post),
goal this month: appropriate sizing
BXC- scratch trade. got started with a super small size to start getting a feel (Trade decision A) for how it traded, didn’t like how wide the spread was and how thin it was so never initiated an actual position and didn’t force a trade here so that was good.
CRIS- same as BXC; started with a tiny size but never saw a good setup (Trade decision B) to actually trade so just got out for scratch; again, good job of not forcing trades
NTNX- lost money but was actually pretty happy about this trade. saw a setup I really liked, saw weakness on the tape and started building a position for short. sized up to tier 3 risk, sized down on the bottom of the channel when there were clear support in the $50.80s (Trade decision C), and got out when my risk was hit.
I think my plan was good, had a clear level that I trusted to risk off of and I followed it.
The execution of my plan was pretty decent for the most part; the only thing I did outside of my plan was I covered part of my position near the top end of the range, just 2 cents below my risk, bc I was a bit scared at that point. recognized it after I got out so I got right back in (Trade decision D)….
Trade decision A- She starts small looking to make another trade decision to get bigger.
Trade decision B- She makes a trade decision not to get bigger, while looking to make another trade decision.
Trade decision C- She sized down, making a trade decision, in a trade she started with the intention to play for a big move. I love the nuance here to this trade. She will go for it if the trade is really working, but lighten up at technical support and if strength on the tape. This is just excellent trading here.
Trade decision D- She exits because she feels potential slippage, thus making a trade decision. I really like her protective decision-making here. If you do not feel you can control your risk above your stop (slippage), better to exit and reevaluate and avoid a huge rip. Then she gets right back in after feeling the risk of slippage is not what she feared. She makes another trade decision. This is an important active trading technique she is archiving of her real-time trading in this review.
Certainly, too many trade decisions harm performance for many. Too few trade decisions thwart the progress of many developing traders. How many trade decisions you will make inside your trading PlayBook is a large area of study for the new, developing and experienced traders.
One developing trader at our firm is not viewing his trading future only as a discretionary trader, but as a hybrid trader. A hybrid trader uses technology to make better trade decisions, and pulls money out of the market as a discretionary trader, discretionary trader armed with tools to make better trade decisions, and with automated models.
Here is that trader’s review after a recent trading session (edited):
Friday was a milestone day for me for a few different reasons. It was a record P/L, first time over ($$$), and a record trade in ZSAN. (Trader N) and I got our first model live, and Friday was the first day the model ran and it yielded a 100% win rate (9 for 9 trades) and made $$$ trading 25 share lots of SPY. I think the thing about Friday that means the most to me is the fact that I visualized both the ZSAN and QQQ trades the evening before and came into the day with a plan that I executed and capitalized on. This was a big step for me in terms of being able to see the opportunities, see them play out, and trade the opportunities. These were two scalable trades in two completely different arenas the can become big-time setups for me in my career. I could have traded them better, and there will be more opportunities to take what I learned Friday and trade these setups better the next time.
There are numerous lessons for new, developing and experienced traders in his write-up:
a) Trader is making better trade decisions as a discretionary trader, with an automated model built with a teammate.
b) Trader is making money as a discretionary trader, a discretionary trader armed with automation to make better trade decisions, and automated models. This is a more expansive career path than just being a discretionary trader.
c) Trader is showing edge with smaller size in different strategies and then will increase his risk. He is experiencing small wins, from which he can build.
d) Trader uses visualization to best prepare for the trading session. This is an excellent best practice that trader ought to replay before more opens.
e) From this success, Trader starts mapping out how he could have traded even better.
Dr. Steenbarger wrote an important post recently about the learning curve of traders. Above is an example of a trader walking through such a learning curve. Notice how he is attacking his career from multiple angles to make money. Notice how Trader is winning at an early stage, well short of 7-figure trader.
The winning that new, developing and experienced traders achieve along the way to their best trader can be seen by this trader above. Thru the power of compounding improvement, this winning lays a foundation that quietly leads to becoming a large and sustaining trader.
During his daily review, a developing trader from the desk, shared a strategy taught by his Senior Trader to help not take profits too quickly. This junior trader wrote,
(edited….Big Dawg) also helped me with my issue of taking off everything too quickly after I take profits the first time. During the last big up move that ADSK had up to 137.5 area, once it got to 137 he said just start selling 5 shares every 5 seconds, you’ll feel better about the trade, feel like your taking profits, and still be able to hold onto a good amount of size if it goes higher. That piece of advice really helped me in that scenario in terms of taking off size slower when I think there is more room. I am planning on continuing to employ that strategy in the future to help me better hold things when I really think there is room.
I have used this technique in the past as well with expensive stocks/products.
It is comforting to be selling something and booking some profits. Yet this technique leaves you in the real position with real size. It is kinda brilliant.
We are only as good as the stocks that we trade. Traders prepare before the open for what and how they will trade- Game plan. The best traders leave room to observe what is working best, that may just be outside their game plan.
One firm trader in his Daily Report Card, wrote on this topic:
One thing I went back and looked at/thought about….. the stocks that were really working ie CLSD, I should’ve found a way to be more aggressive. Over time, if I can learn to shift that focus in real time and make that realization, there are opportunities to make my day in one stock. I think today especially, it was hard to do with so many names of interest on the open, but a deeper morning preparation can help. Ie, going mentally thru more scenarios.
Dr. Steenbarger, who works with this prop trader, flagged the comments above as significant for the trader. He responded to this trader:
….this is a great observation and a great thing to work on. The key is shifting the focus in real time: quality of preparation helps with that, as you point out, and short breaks from trading where you can scan the universe of candidate stocks/trades can help the process. What I think you’ll find is that, with experience and great prep, those breaks will become shorter and shorter and eventually you’ll be able to shift your focus in real time like that Shark guy you might have heard of…
During the same evening a developing trader wrote on the same need to observe opportunity in real-time, in his review:
I have to be more flexible in terms of understanding there’s nothing that fits my eye prior to the open but at the same time that if a pattern shows up that’s in my Playbook I must put risk to work.
A good best practice is to schedule time during the open and build into habit looking for opportunities that just visit. It is terrific to game plan. But you also want to be open-minded for an opportunity that just arrives.
Leave room in your Game Plan for trades to just appear.
In his monthly review, a now consistently profitable trader highlighted a major achievement.
I grossed well over 15k and compared to other months I didn’t incur too many fees (trading commissions and locates). I had many 4 fig days and my biggest day to date of 4k. Month over month I saw huge growth and believe I am on track to achieve my 150 – 300k goal.
Worked off fees and receive paycheck – big milestone for me.
This is huge. Psychologically this is a great deal for me. Finally, I am getting paid from trading. (edited) after 1.5 years I can now just focus on growing as a trader and being able to support myself comfortably. This is a game changer for me.
There is a very real learning curve as a trader. Those willing and able to withstand the learning curve, work, have ability, and find edge in time can become profitable.
What I have not mentioned yet, is the discussion this trader asked to have with me about whether he ought to continue. This trader who is now tracking to earn a White Shirt this year was faced with a serious decision about whether to quit or give trading some more time. I suggested we needed another 6 months of data at the time. Personally, I thought he was doing just fine.
This trader was making money, although not enough. Trading was what he loved (some really don’t and ought to move on). He did the work. He fit in very well at the firm. He was improving. He was showing consistency. To me it was more just a matter of time before his results would enable him to support himself via trading.
Thankfully, he kept going. Now the future of being a successful trader is real.
But he seriously wanted input from his Senior Trader and partners about whether he should continue. I counseled he should and was willing to support this effort. His Senior Trader voiced he ought to press on.
Often I say to interview candidates it takes 18 months to 2 years to learn if you can make. You can. It appears this trader will. It took 18 months.
For those not 2 years in and not yet seeing your desired results, it might just be a matter of time.
One trader at the firm underperformed this month. In his own words, he is in a nasty losing trading streak.
He is a developing trader and working to be consistent. He actually was an SMB Training student who impressed us so much, he was hired to trade on our desk.
During a one-on-one mentoring session with this trader, he quickly found connections for his poor trading. He lacked proper sleep one session. He ate poorly the night before another session. In a tailspin of 8/9 poor trading sessions, he felt they all could have been avoided.
For the record, even with this poor trading he still finished positive for the month. So there is good in his trading and an ability to trade with edge.
The key for this trader is to trade his A+ PlayBook trades. The tailspin is a result of this trader not taking enough of his A+ trades.
So should this trader work on his poor trading? Or should the trader double down on an optimal personal routine that ensures he will take his A+ trades?
Think of how differently this month’s goals would be. On one hand, trader tries to trade his A+ trades better. With another approach, trader focuses his energy on completing his routine that leads to taking A+ trades. The first approach imbibes trader with pressure and stress. The later with an emphasis on process and the little things that measurably breed better trade choices.
The trader can trade with edge in A+ trades. The focus ought to be on how he takes more of them. The solution is doubling down on the routine that leads to A+ trades and eliminating the destructive behavior that manifests banging into lesser trades.
In walking through this solution with this developing trader, I mentioned as primary source evidence another trader on the desk for whom this approach is paramount. This other trader went 30k plus, 30k plus, negative, 30k plus the past four months. Getting this other trader back on track was an issue of a focus on his routine of best practices.
Both of these traders have edge, so you need that first for this focus to work. But often it is not the poor trading that ought to be our focus, but rather the poor adoption of our routines.
In winding down our conversation, the developing trader predicted, “this month is gonna be great.”
March 3, 2018
SMB Options Desk Trader
Yesterday in the Trading Conversations webinar, I was asked for an update on the SPX Netzero Options trades. It was perfect timing because a few minutes before the webinar started, I was approved to put my largest size on the SMB Options Desk into a CL (Crude Oil) Netzero. After mentioning this, several emails and slack room messages came in asking for the reasons for this change. The following answers the common questions which I have been receiving regarding this update to my trading plan.
My shift in focus from index options to commodities options began over a year ago when, in October 2016, I had the opportunity to spend a month at SMB where Merritt Black introduced me to the benefits of the CL futures market.
The cause for my shift from equity indexes to commodities is not because VIX is now too high or that it was just recently too low. It’s that we are facing a regime of large gyrations in Implied Volatility and the potential for extreme IV short covering. The ability to control risk in equity/index options trades is more challenging than it was from 2009 through 2017.
Implied Volatility on equities has become part of a financial engineering game of musical chairs. The music has already stopped one time, and XIV and SVXY are essentially out of the game.
A big factor in the decision to execute any trading strategy is the risk-adjusted return of the strategy. I use potential drawdowns in trades as the denominator and the annual expectancy as the numerator. For now, that relationship is not adequate for me to trade negative Gamma index options trades. The only solutions I have found for the current environment come with extreme complexity, tremendous execution risk, and rapidly increasing commission cost to expectancy ratio.
The commodities futures markets are not a part of this financial engineering game and CL has the key characteristics needed for good option spread trading, and with much more favorable risk vs. reward. Some other benefits of CL options are that they are easier to fill, trade overnight, have a great vol skew for trading both sides of the market, etc.
Something that I’m very excited about is that the Netzero concept and it’s 60-40-20 trade plan have converted over to CL without a single modification. There are some differences to get used to (the 1,000 multiple instead of 100, low price underlying, splitting strikes more often), but these issues are quite minor and take only a few days to get used to.
We are actively discussing the CL Netzero trade in the Options and Systems Workshop, and I hold a live Workshop Meeting every Wednesday to discuss various topics including CL Netzero, volatility trading, long and short options strategies for equities, algorithm development, market statistics, and more.
The Workshop Slack room is the best place to get ahold of me, have discussions, and work with other traders that are seeking to improve their trading; and I would love to have you try it out.
Today on the desk we discussed the importance of creating a plan for if the White House walks back its pronouncement to raise tariffs on steel and aluminum. After this announcement, the markets sold off hard and there were winners and losers.
One of the really fun things traders can do our desk is play with technology. Two traders could be heard discussing building a basket of stocks and products to buy if the tariffs are walked back. They thought about what had been hit hardest to add to their basket and how to build.
During our AM meeting we discussed this possibility as well the potential for follow thru to the downside. We asked our traders to review what did well and what got hit hard yesterday for trading opportunities today.
During our 11AM Trader Development mentoring session, we again discussed what to buy and sell if the White House walked back raising tariffs. Some ideas (not meant to be comprehensive): Buy F, BA, GM, SPY, CMI, CAT. The idea is to review what has been hit the hardest and be ready to buy if a walk back occurs. Some more ideas: Short X, VXX.
This is not a political statement, but a pattern recognition observation. The White House has a history of walking back statements of late. So this is something for which to prepare as a trader.
Mike discusses how he traded BOX this open after it reported earnings. He discusses his swing trade that he has on with his target and stops. And how to scalp around a swing position in an opportunity like BOX.
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