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Mastering The Trading Game With Mike Bellafiore
In the Spotlight | 17 August 2012
By: Choo Hao Xiang
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By: Louis Kent Lee
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As one learns from watching the highly anticipated 100-metre event at the Olympic Games 2012, it is that anything can take place within 10 seconds. The transition phase where sprinters reach their peak speeds to the finish line is akin to the market fluctuations every trader has to face.

That duration of a mere but crucial few seconds may likely be the opportune window presented to a trader on the trading floor. This might leave one wondering how one is supposed to pick his or her spots within such a brief moment under a very tense environment as the way markets are of late. Fear not, we have that covered. Particularly when we are talking about intraday positioning.

Leading up to his talk “Beat the Market with ONE GOOD TRADE” at Shares Investment Conference 2012, Mike Bellafiore – the co-founder of SMB Capital, a proprietary trading firm that has been recognised for its outstanding training program – let us in on the road to becoming a successful trader. He also shared his views on what is installed for the world economy going forward in a recent e-mail correspondence.

Shares Investment: You mentioned before that you changed your trading style six times in your trading career. What type of trader are you?

Mike Bellafiore: I am an intraday trend trader. I want to short stocks that are broken intraday. I want to take long positions on stocks that are bullish intraday. I use long-term technical analysis indicators, intraday fundamentals and reading the tape to improve my decision making process. So, for example, I do not just want to short anything broken intraday. I want to short stocks that are broken on the long-term charts, show weakness on the tape, have a negative new catalyst behind them and are broken intraday. I look for the mirror image on the long side. I trade long and short.

SI: What is the one thing that differentiates you from the other traders?

Bellafiore: My strategies are taught to and traded by a professional trading desk, which I co-founded, SMB Capital, with our capital. I am a very skilled trader. I started as a tape reader and then over the years have learned technical analysis and how to incorporate intraday fundamentals. Also I have traded many different styles from Relative Strength to Momentum to Scalping to Counter Trend Trading to Swing Trading to Trend Trading.

SI: The trading realm is always on the move; rapid changes are always occurring and new things happen every now and then. How do you determine which strategy to adopt in any particular day? Can you provide us with an example?

Bellafiore: This starts with first embracing that trading is a privilege. You do not have a right to trade. Even for me, a pro trader who has over 14 years in experience, this whole trading game can be taken away in one bad trade or one bad day or one bad month. Knight Trading Group lost almost US$500 million in one day recently and saw its market value dip over 50 percent. They had to reach out for further financing to potentially save their firm.

What works today may not work tomorrow. What worked in the past may not work going forward. This is my critique of trader training. It is often insufficient. A trading guru stands in front of a room full of ambitious and bright students. That guru shares a simple trading setup that works for him or her. And that guru and students think they then can go start crushing the market. It doesn’t work like that.

We teach our traders to develop a playbook of trades that makes the most sense to them. I expose them to a series of patterns and offer suggestions on how to trade these setups. But then, I make them practice. I teach them how to internalise these trades so they are then their own. I teach them how to think through a trade so that when the market shifts they can make the necessary adjustments to a setup. So no matter what market, no matter what product, no matter how the market is behaving, my traders have the skill to successfully navigate any market and at any time.

There is nothing to get as a trader. There is never a time when you will have conquered the markets. There is the endless and enjoyable journey of competing each day against the most competitive people in the world at the best game in the world – trading.

SI: How do you determine the buy and sell points?

Bellafiore: I use six factors:

  1. The Big Picture
  2. Intraday Fundamentals
  3. Long-Term Technicals
  4. Intraday Technicals
  5. Reading the Tape
  6. Intuition

SI: In ‘The Playbook’ that is due to published later this year, you will reveal how professional traders must think in order to succeed under extremely daunting conditions. How important is the mindset tuning process for a new trader?

Bellafiore: If I find a trader on my desk without the mindset of improving each day, I manage that trader out of my firm. Each trading day, your goal should be to grow. Learn. Step outside of your comfort zone. Gain experience with a new trading pattern. Get better at trading your favourite trading pattern. Trade it with more size. Find more patterns like this. No matter what your trading profit and loss is.

I was sent an email from a trader the other day lamenting stop outs in his biggest size ever. He made a market play in a series of market stocks. The market was showing weakness and trending lower. He sized up on the short side, playing for the real move. He was well in the money. And then the market turned. He got stopped out. He went from a personal high to a negative on that trading day. I said, “Great day. Great job getting bigger in a good set up. Keep working on your trading game.”

He got it. If not, he would have been out the door in short order.

SI: Let us talk a bit about your views on what’s happening around the world. Considering the impact of the Eurozone drama and the slow progression of it, do you think the Euro can be saved?

Bellafiore: This depends on how generous Germany and France wish to be to Greece, Spain, Portugal and Italy. This depends on whether these countries, politically, can withstand protests for better economic days. One thing that is clear to me as a trader: if Greece steps away from the Eurozone, this will cause uncertainty in the markets. Uncertainty breeds lower prices. The markets shoot first and then ask questions later. A run on the European banks would be possible. Political chaos could follow. Commodities would spike. I am rooting that I do not see this day.

I still remember what it was like trading the financial collapse of 2008. My firm was killing it and I was sick to my stomach. It was the strangest feeling. We were profiting like we never had in firm history and I was rooting for all of it to end. I wanted to stop making so much money for the good of our financial security. I will not mind missing another trading opportunity like that.

SI: What’s your take of a possibility of a double dip in the US?

Bellafiore: A majority is expecting further weakness in the US economy. Unemployment is still above 8 percent, historically high for the States, but still improving. Our private sector job growth is increasing but government jobs across all levels are being cut. There is no political appetite to spend more money at all levels of government. Private equity stands on the sidelines ready to bankroll a good idea. The banks are not borrowing. Inflation is in check which is terrific for those on a fixed income. Energy prices are historically high. Wages are down across the board. Wall Street is bracing for another round of deep cuts. Europe is a concern. The deleveraging across all countries, all sectors, all consumers and all levels of governments dampens the potential for growth. The slowing growth in China is trouble. Where will the growth come from? There is no clear answer to that question. As such, a majority is expecting continued economic struggle.

I am not so sure. Great ideas can still receive funding from private equity. Technology allows you to build a business cheaper than ever. The internet offers the opportunity to grow a global business if you develop awesomeness in a niche. Half of our business for SMB University is done from international leads. This is not indigenous to my education company. There are pockets of strength and interesting investment themes: social media, cloud computing, technology, new media, clean energy, energy, etc. There are very smart people betting on a recovery.

SI: In all, do you see a bleak outlook for the remainder of 2012, and do you see opportunities buried amongst the ashes?

Bellafiore: I don’t. But I am an optimistic person by nature. I see tail winds for the worldwide economy. I just cannot discount how easy it is to start a global business today. Our productivity potential has never been higher because of technological advancements. You can hire talented people for less in just about any sector. There is money for those with a great idea. Instagram went from a few employees to a billion dollar sale. Companies can become huge quickly. I see this as the catalyst for a better tomorrow.

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

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