How Do I Simplify My Trading?

Dear Mr. Bellafiore,

My name is (deleted), and I’ve contacted you in the past. One of our conversations ended up on your blog and eventually made it into your book (http://www.smbtraining.com/blog/should-this-trader-make-a-comeback). Your responses to my inquiries have always been courteous and insightful, so I’m turning to you once again for some more advice.

With the full support of my spouse, I have re-entered the world of proprietary trading. I became completely fed up with the corporate world, and I decided that I wanted to try and take control of my life. The last time I sat on a prop desk was in April 2009, and now I’m trading remote. I understand that the markets have changed since 2009, and that I’ll have a lot of catching up to do. I have a “money clock” above my head that has already started to tick, but I recently accepted a part time position (non-market hours) to help alleviate some of my living expenses. Some people may think that I’m crazy, but I consider this taking a big risk for a potentially big reward.

If you remember the above post, you will know that my previous mentor/boss was an outstanding trader. He always preached using as few charts and as few indicators as possible. In fact, he traded using a daily chart that spanned back a few months, an intraday one minute chart and a level 2 with uncolored prints. Many traders, myself included, had a hard time with his methodology, and we eventually began tweaking our layouts with many different charts and indicators to make up for our lack of experience and tape reading skills.

I recently pulled up a screenshot of my layout from 2009, and it included the following:

*3 Minute – Intraday Chart
*10 Minute – 3 Day Chart
*30 Minute – 10 Day Chart
* Daily Chart (1 Year) with a 20, 50 and 200 day simple
moving average.

After reading Brian Shannon’s technical analysis book, I sort of became fixated on a stock’s moving averages. I don’t use them as levels, but I had a cardinal rule which stated that I would only consider a long position in a stock if its price was above all three of the moving averages and the 20ma trended over the 50ma and the 50ma trended over the 200ma. I would only consider a short position if the criteria was vice versa. I know this sounds insane, and it limited many trading opportunities for me, but every time I broke that rule, the trade always seemed to result in negative P&L.

I’m writing to you because I want to see if you have any thoughts/advice about simplifying my trading. I obviously have trading experience, but I never really pulled any significant money out of the market. I recently was re-reading “The Playbook” and I noticed that you are also a big proponent of using only a few charts and very few indicators. I also read an article in the past that said you use uncolored prints because you don’t want to create a false impression (sorry I don’t mean to stalk you). I’m not trying to copy you, however, I don’t want to run into a few negative trading days in the future and feel like I need to change everything around.

I also don’t have much confidence in my past trading set up because I never saw great results with it (which is more of a byproduct of my lack of trading skills as a beginning trader). I know that different style traders will use different time frames, and that their trading success ultimately comes down to much more important aspects such as reading order flow, picking proper set ups, calculating Risk vs. Reward and etc. However, for my second go around, I want to pick a set up, stick with that set up, document my trades using that setup and eventually get on the road to consistent profitability.

@MikeBellafiore

You have a great place to start. You wrote:

but I had a cardinal rule which stated that I would only consider a long position in a stock if its price was above all three of the moving averages and the 20ma trended over the 50ma and the 50ma trended over the 200ma. I would only consider a short position if the criteria was vice versa.

Why not back-test these results? You will need to add inputs for daily volume, price of stock, ATR, entry and exit logic. If the results are promising, then consider building custom filters so you are alerted to ALL of these opportunities. If the results are not positive then consider using your discretion with these setups to find the best of the best of these opportunities. Maybe taking all of these trades will not work, but they most will with the direction of the market or most will with a very clean tape in the direction of the moving averages. Trade these setups in real-time and keep specific results of these trades. If you are profitable with these setups then allocate more risk and buying power to these trades.

Recently one of our traders was given 3xs his past buying power and max share size for one specific trade that he tested, built filters for, and trades well in real-time.

Traders must become bionic in this trading landscape. Deconstruct what makes sense to you, what you do well and then do more of that with a helping hand from technology.

If the results are really good, then perhaps you can consider automating these trades.

But why not start here and see how you do. From there you might have a positive base from which to build your trading career.

I hope that helps. Please let me know how you do.

“You can be better tomorrow than you are today!”

Mike Bellafiore is the Co-Founder of SMB Capital and SMBU, which provides trading education in stocks, options, forex and futures. Bella is the author of One Good Trade and The PlayBook. He invites your questions at [email protected].