Tim Bourquin: Hello everybody and welcome back to another episode of Trader Interviews. Something a little bit different this week. We’re going to be talking with Mike Bellafiore and he’s got a new book coming out called,
One Good Trade: Inside the Highly Competitive World of Proprietary Trading. And what I thought was interesting about this was that -- look there are a lot of people out there that write trading books that you can probably tell at some point that they don’t actually trade. And Mike is absolutely a trader first and decided to write about his experiences starting the Prop Trading Firm and his experiences watching other traders succeed and fail and I think it’s going to be an interesting read, and I want to talk to him about his trading strategies as well. So, Mike thanks very much for joining me on the phone today.
Mike Bellafiore: Thanks a lot Tim for having me.
Tim Bourquin: All right. Well, we’re going to talk about the book in just a second, but just to give our listeners a feel for your own kind of personal style. What kind of trader are you? What do you trade and timeframes, that sort of thing?because Mike Bellafiore: Well, I’m a short-term active trader. And one of the really interesting things about -- what I wrote about it in the book, is the last chapter where I talk about adapting. You know people always ask how we go about making money and if you talked to me in 2007, I’m going to have a specific answer and that’s going to be different than 2008 which is going to be different in 2009 and different in the way it is now. And one of the things that we do is we find the patterns that are working for us now and we’re humble enough to understand that what works for us one month may not the next and that’s just the way it is. Well there are some trades that may work last year aren’t working now and we have to find a way to find the patterns that makes sense to us today and exploit them.
Tim Bourquin: I’m glad you brought this up because a lot of traders want to find their strategy and trade it for years, trade it forever. So, if you’re constantly having to reinvent, basically almost relearning how to trade every year, how do you keep up with that?
Mike Bellafiore: There’s nothing to get as a trader and I think for new guys that’s frustrating. They learn a particular pattern -- I’ll give you a great example. One of our really terrific, bright new traders was killing it trading momentum stocks. And in fact he was getting a little arrogant to the point where I noticed that he stopped coming to our AM meetings that we hold every morning. And I took him aside and I said, well number one, “I’m providing the capital so get your ass into that AM meeting every day.” But secondly and most importantly, “The momentum trades that you’re killing right now are going to be out of flavor in a little bit and you have to learn different setups.” And sure enough, we tanked after that and there were some other patterns that really worked. But I love your principle in your question about making trades your own because that is what it’s about. I can teach somebody a consolidation play, but my brain thinks differently than yours. I’ll give you the standard as to how to do it, but then you’ve got to practice it and make it your own.
Tim Bourquin: We’ve talked to a lot of traders who -- the successful ones seem to be very good at reading the right side of the chart, in other words, the side of the chart that hasn’t printed yet. Everybody and I’m sure you’ve seen this in classes, we’re all very good at saying, “Yes, I see that’s the head and shoulders “and “Oh, that looks like a bear flag.” We can all see it perfectly after the fact. How do you train somebody, how do you get good at seeing it as it’s happening?
Mike Bellafiore: One of the things that we do is we read the tape so, it’s a little bit easier for us to get on the right side of a trade. Reading the tape is a leading indicator. The charts are a lagging indicator. But just to actually answer your question as you presented it, look learning how to read charts is probably one of the hardest things to do and I think that’s not understood in the trading community. It’s actually why we don’t think just trading off the charts is the best way to start your trading career. We combine intraday fundamentals with reading the tape and then technical analysis or reading your charts for new and developing traders, but it takes years. It’s an art form as to -- a great example is in IBM today, 120 is where there was a little bit of a level. One move on our charts indicated that it was very likely to go up and one move wasn’t. And, you know, we had a 15-minute discussion about the nuances of looking at charts and understanding that.
Tim Bourquin: When you get in these rooms and you talk with these traders and have discussions about that, I know that you invite all kinds of opinions about the charts and who’s right about it if there is such a thing. Is there such a thing as the person in the room who’s right about it and is that just the person who made money on it?
Mike Bellafiore: No. No, no. A lot of times you can look at a particular setup and there’s a trade to be made on the short side and there’s a trade to be made on the long side. And as long as your risk-reward is controlled, as long as the pattern makes sense to you, somebody can be short and somebody can be long and somebody’s obviously going to win, but trading is a game of probabilities. I know that sounds a little bit strange that everyone sort of thinks -- a lot of people think that if I’m right I’ve made a good trade. One of the chapters in “One Good Trade” dispels that very notion. Your job is to make excellent risk-reward decisions. Your job is not to make money your job is to find patterns that offer you a downside of 1 and an upside of 5.
Tim Bourquin: I’ve heard you say that before, 1 in 5 and that always strikes me as tough to find ‘cause you hear of a lot traders talk about 2:1 or 3:1 but 5:1 that’s how many trades a day do you find that offer that?
Mike Bellafiore: Probably three or four. You know, we just actually got out of a classroom session where we discussed the particular setup in IBM. And it was a little bit of a heated discussion because I challenged our guys when they see a particular setup like we saw in this IBM today around the 12380-ish level, stock fell 126 a little bit later that number one, they’ve got to identify how to get in that trade for them. There’s this voice that goes off in every great trader’s head that says, “This is it. I see it. This is an A trade for me.” And then the thing that they have to do after the close is replay that very trade and find a way to add size and hold that trade for longer. We become better as traders by finding the trades that make sense to us, as you were alluding to, and trading them with more size.
Tim Bourquin: The guys that you see achieve success and start making money faster than those that don’t, do you see any common thread there? Anything that you can point to and say --
Mike Bellafiore: Sure. They’re always the guys that work harder. There’s no secret sauce to any of this. The people that work hard -- and this isn’t just true in trading. This is true of any -- this true of people who run a prop firm. The people that work the hardest do the best.
Tim Bourquin: Okay. So, I guess the question then becomes what is hard work in trading? ‘Cause people think that the work is just being able to get better at identifying the pattern. So, what is hard work in trading?
Mike Bellafiore: I think that there’s a way to simulate each day. I think there’s a way to turn one trading day into 10 and this is really the way that I think you ought to go about being efficient with your day. So, let’s say that you made this trade in IBM, this consolidation play at 12380 today and you trade it live and that’s great. That’s one trading experience. But then you should journal about it. You should talk to other guys on your desk about this setup. You should think about this setup when you go home. You should videotape your trading of that play and watch it back. You should take it and go into a group setting like we just did and play back that scenario and talk about it. You should visualize this very setup. You should have a simulator where we can -- we have actually a special simulator. We can actually take that data, can it, and let guys trade that setup over and over and over again live and execute it. So, when people talk about working hard, I mean it’s really about simulation. It’s like being a professional athlete. If you were to become a great basketball shooter, you’d have to go out and practice, right?
Tim Bourquin: Yes.
Mike Bellafiore: And there are things that you can do as a trader to practice. And if you’re going to practice, you’re going to get better. And if you’re not -- you know at 4 or 5 if you’re going to shoot off an email to your buddies and say, let’s go grab a drink, and you guys are going to go and talk about LeBron James going to the Miami Heat and no one talks about this IBM trade, who are you kidding? Who are you kidding? You’re not going to get better.
Tim Bourquin: And you’ve mentioned that in blog posts about the fact that you see traders waste their time all the time either on a subway ride or whatever it maybe when they could be improving their trading just by talking about good trades.
Mike Bellafiore: That drives me crazy Tim. Look, when you get an opportunity to trade on a prop desk or any trading desk it’s the greatest opportunity you’ll ever have. And I talked about this in one of my blogs awhile ago how I got caught in the subway with three young guys, great guys, smart guys, terrific guys. And trading day had just ended -- working at a very good firm, on the subway with them up to the upper Westside and they’re talking about what? They’re talking about how much money all the partners in their firm have made that year. It was amazing to me how much detail and how much knowledge they had about how much money everybody was making. And how during this – after this trading day, where there was so much action and there was so much to talk about that they didn’t talk about trading. When Steve and I -- my business partner Steve Spencer and I get on the subway and we go home, I can tell you that we talk about trading. And you know that’s what -- that’s a really great indicator of whether or not you’re doing the stuff you need to.
Tim Bourquin: So, is there a time for getting away from the markets? Is there value in resting your mind from the trading game for awhile?
Mike Bellafiore: Absolutely. Absolutely. And I think that working out and being happy -- I mean if you’re miserable in your personal life, it’s going to come out in your trading. If you’re lazy in your personal life, it’s going to come out in your trading. If you’re undisciplined, it’s going to come out in your trading. If you’re inconsistent, trading is not the place to be while you’re trying to work on improving your personal habits. So, you want to be a well-rounded, happy, and engaged person.
Tim Bourquin: It’s funny. I’ve thought about this that people that talk about -- people who drink right when they’re -- they’re bad drunks ‘cause it just accentuates what their real personality is. It almost sounds like trading does the same thing. Your real personality is going to come out either way.
Mike Bellafiore: You know I actually wrote about one of my favorite traders of all time, a great guy. And he actually -- he isn’t trading with us anymore, he trades for somebody else, and he started to trade with us. Incredibly talented guy, I mean former college athlete, high school all-American athlete, gifted as can be, 99 percentile likable. But you know he loved to play Mad and football ‘til whenever he wanted in the morning and he would stroll in some days. He loved to go to Atlantic City whenever he wanted and stroll in for the open. And just in his personal life, he was not disciplined and it showed up in his trading. He was a great momentum trader during certain times and other times he’s a little reckless. And he’d have these great days and then he had these horrendous days. And it really all stemmed back to he was a little bit too young and little bit too reckless to find his potential.
Tim Bourquin: You talked about a lot of stories like this in the book. Talk about why did you write the book in the first place? What value is there for you to talk about these stories of traders that have come and gone?
Mike Bellafiore: I just wanted to share what the market has taught me. And I started writing this blog and you know all of this SMB started as just an idea. I had no idea any of this was going to happen. And I started writing the blog and Dr. Steenbarger reached out to me and encouraged me to think about writing a book and I was like, “Oh, you know come on. How could I do that?” And then he did it again and I was like, “Nah.” But then I started thinking about it and I said I enjoy writing and I really do have all of these materials from having traded and having trained guys and having sat next to successful and people who failed. And I thought that what I would do is -- and I had this interesting perspective of being on a prop desk which nobody has ever written about. You know, you get to see what it’s like to be inside a prop desk and this is really the first book about that. But then we found a way to tell very interesting stories with a teaching principle wrapped inside. And so the culmination of all of it is a look inside a prop desk that you haven’t seen before and a whole bunch of stuff the market has taught me and really interesting anecdotes and stories.
Tim Bourquin: Do you think that’s the best way to learn how to trade? It’s to listen to the stories of other traders who’ve come before you?
Mike Bellafiore: I think it’s a start. There are four ways you learn: One is domain knowledge which is what this book would be about. The second is motivation, how do you find a way to motivate yourself. The third is critical feedback. That’s what we were doing in our training room, talking to my guys about what they should be doing. The fourth thing is simulation. That’s how you’re going to get better as a trader. But picking up books and reading is a great way to build an impressive array of domain knowledge.
Tim Bourquin: All right. And then finally Mike, for the retail trader who’s at home in Nebraska, Seattle, wherever he or she is, and they don’t have the ability to have a morning meeting, is there any way to duplicate that online or any way to kind of get that same benefit either a chat room or something else with an at-home trader?
Mike Bellafiore: I mean -- not to talk about our firm, but there actually are ways to be -- we actually do offer the opportunity for people to be connected to our AM meeting through our commercial website and we’re not the only ones who do this. There -- T3 Live is another, had a great AM call. I don’t know. I think T3 and us maybe we’re the only to do that. There must be others. So you can actually connect to a prop desk these days. Look, I feel very strongly about this. Barry Ritholtz always writes about the fact that if you reach out to people in the trading community and ask them questions, they will write back to you. And I’ve always found that to be the case. I reached out to Dr. Steenbarger and now – he at one point became a trading coach to us. People will respond and you can build these relationships. And I think a great, great thing for you to do is build this online community of like-minded traders. StockTwits is a great place to find people that trade like you and there are a lot of great resources.
Tim Bourquin: Yeah, people are always surprised. They say, “Why do these traders talk to you?” And I say, “I just ask. I just asked the question and really it’s not that difficult.” They seem to think the guys don’t ever want to talk and really it’s just a matter of asking them and getting in touch with them and finding them. So, I think you’re definitely right there. All right. Well, the book is called “One Good Trade.” You can find the link to it right below the link to the audio file here. It’ll be at the top of the transcripts. Mike thanks very much for your time. Best of luck with the book itself.
Tim Bellafiore: Thanks a lot Tim