SMB Capital trades Stocks in Play. Our traders are taught how to find such stocks. And during our SMB AM Meeting we review the best Stocks in Play for a particular trading day. Over the past few years I’ve had quite a few conversations with interviewees, including “experienced traders”, about this core trading philosophy. Some don’t seem to grasp the importance of this principle. Let me explain.

Our ability to make money consistently as intraday traders relies on our high daily win rate. If you ask any professional trader how many days they are net positive each month they can give you that figure. It is between 80-90% for almost all successful traders (a few on our desk are consistently above 95%: think GMan). How can professional traders have such a high win rate? There are three basic reasons for such a high level of success: 1) they develop a skill set over time that allows them to get in and out of stocks efficiently 2) they develop pattern recognition skills that enable them to accurately assess their risk versus reward and 3) they are in the right stocks.

The right stocks are those that we have identified as Stocks in Play. These stocks will have greater order flow than normal. This does several things that give our traders an advantage: 1) increased order flow increases liquidity which allows us to risk less on each entry and exit from a position; 2) the greater order flow creates additional volatility which leads to many favorable risk/reward scenarios during the day; and 3) the large number of orders will overwhelm the dopey algorithmic trading programs which results in a stock moving more cleanly.

If a stock is in play then there is a 95% chance that I will make money trading it. During our SMB AM Meeting on Friday we highlighted RIMM as a Stock in Play. 19/22 traders were net positive trading RIMM. I can even make three or four losing trades in a row. But by the end of the day I will be presented with so many trading opportunities that I inevitably finish positive in the stock for that day. Today I traded MON and AAPL. Both were In Play and I had no difficulty making money in them.

There is one other point I want to make about stock selection. Sometimes I am unable to identify a stock that fits my criteria for being In Play and I will trade an ETF or a momentum stock because both have a tendency to make several good moves each day. But my first choice is always to be in a Stock In Play.

Happy holidays.