In this video learn 7 reasons why you should never exceed your stop loss as a trader. We review one of our favorite trades: The Big Dog Consolidation, in step by step detail, while providing critical feedback to help a senior trader reach the next level in his trading.
View Video Transcriptin this video learned seven reasons why
you should never exceed your stop-loss
as a trader hi I’m Mike bellafiore
co-founder of SMB capital and we’re
proprietary trading firm located in
midtown Manhattan and I’m also the
author of the trading classic one good
trade and the playbook
in this video review one of our favorite
trades the Big Dawg consolidation and
step-by-step detail Wow
providing critical feedback to help a
senior trader reach that next level in
us trading
[Music]
I did a playbook on AI npx the move that
happened January 7th following a really
big move and after shark came in and
really brought this stock to our
attention which doesn’t happen every day
and I thought was very interesting I’m
running through the backgrounds start
off with a big picture I keep it real
short and sweet all that really matters
to me right now is we’re in a very
strong bull market I don’t want to
overthink anything no matter what you
see newswise everything that’s going on
the market just has been grinding higher
for months now and I want very much to
not overthink it
intraday fundamentals I npx had moved
from everything split adjusted so I
don’t even know the actual numbers but
it was a less than a dollar stock that
went from approximately two to three
cents up to about 60 cents in just a few
days the day prior to the trade and why
shark brought it to our attention is the
middle of the day they announced a 1 445
reverse split so they could stay
compliant with Nasdaq listing
requirements I was trading a very high
volume I think he said it traded 300 and
300 and some million shares the day
before and from the very brief and
cursory fundamental analysis it looked
purely on hype I couldn’t find anything
they could justify that kind of a move a
company has 5 million dollars in
revenues no earnings so walk me through
that
sure so thesis is stocks up too much
thesis is like no fundamental basis that
I can justify at all I read the press
release and it said we’re going to spend
this much money buying this
it did not outlay or give me anything I
could point to you that would lead to
earnings or any real change in the
fundamentals it was a hope and high
press release though I could see no
substance at all so and I don’t want to
overplay it I did my fundamental
analysis on this was less than 5 minutes
anyone covering the stock that you were
looking out for no no one covers the
stock overall 5 million in revenues at
all
nothing it’s this is and I really wonder
about what those revenues are meaning
you wonder if they’re real if they’re
pertinent to their business ok
so I don’t think it’s fraudulent I just
think it’s what’s the right word
lipstick on a pig yeah and so when
you’re looking through so you think
something’s up too much and you start to
look through whether or not it’s
sustainable generally what are some of
the things that you want to know if it’s
a company that doesn’t have earnings or
particularly in this case revenues a
path to that a product that’s coming to
the market we’ve spent a lot of time on
biotech which are there’s a lot of
clinical stage development developmental
biotech companies which don’t have any
revenues but but have a molecule or a
compound or some intellectual property
that they own the rights to I can’t see
anything that this company has that’s
proprietary that is exclusive at all so
but yeah a pathway to profitability or
at least revenues so intraday
fundamentals again given the 145 1 445
reverse split I really don’t have a lot
of confidence in the integrity of these
but I put them in here anyway
just checking the boxes and it’s worth
keeping in mind if you want to learn 3
real world setups that our traders use
including this simple setup that we
teach all of our new traders and the set
up that turned one of our traders into a
seven-figure big money earner check out
the free webinar that we’re currently
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that’s gonna open up this free
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don’t worry you’re not gonna lose this
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couple of hours from this trading
workshop then from years of online
education this chart is really
interesting to me this is nine hundred
dollars here this is again on a split
adjusted basis and the stock had just
declined from about nine hundred dollars
down to five before the activity and
these are all the trades that we did but
it literally doesn’t even show up and
this is September of 2018 I’m still long
so this is not over a long term time for
I didn’t buy the typo
five that would be that would be
discouraging to come on from there and
all that yes this is this tells me that
there’s something going on here and it’s
shark did mention it it’s they
consistently issue stock so this is the
short-term activity and this is the very
you know feud a run up where it went
again split adjusted where it two
dollars down here and we get up to a
twenty eight dollars right here this is
the day before where he was all active
and and then this is when they announced
the one for forty five split stock just
absolutely imploded so in terms of
naming the trade I call I thought about
a second day play some things like that
but I went with trend trends because you
know is actively in a downtrend and I
was looking for intraday breakdowns and
you know down trends within the
downtrend so reading the tape I don’t
have level two my system up here so that
wasn’t a big part of it so I just you
know there was persistent selling over
the day so here’s where we get into the
details and what I was really looking to
do I’m on the sim so there’s it’s you
know it doesn’t cost me anything and I’m
really trying to experiment but I’m
trying to figure out how to really push
size how to get big and do it
intelligently and in a manner that’s
very consistent with not losing a lot of
money but also my designated limits I
have a theoretical limit of 500 dollars
per traded I want to lose more than five
hundred dollars per trade and that’s
what I used here this is a consolidation
area of about 725 and I used to stop
order to enter at the close
excuse me at the open that was triggered
at $7 so I was short shares of $7 at
9:30 and this is about 931 I’m in the
hole I did again the sim factored into
my decisions here I didn’t let that faze
me I really wanted to see how this is
gonna play out this happened so fast
that he didn’t literally didn’t have a
chance to respond it just went straight
up and then straight back down in about
four minutes so I went way below past my
risk limit but I was back here with you
know down there’s only a couple minutes
later and and just didn’t have time to
respond I did not have a automated stop
and it was I wasn’t
using a mental stop at this period at
this point just because of some of the
volatility this also influenced my
decision not to enter the trade here I
did recognize this at the time it moved
up I was down all right so I have to
stop there absolutely I think you know I
have to stop you there yes
you work at a proper and you will meet
with your floor manager your floor
manager will go over your maximum
intraday loss the firm is giving you
license to lose that amount intraday
term is not giving you license to lose
one dollar more than that losing one
more one more dollar losing a dollar
more than that is a breach of trust it’s
irresponsible it is at a hedge fund they
may even treat it more drastically it is
a fireable offense on the spot period
full stop and you know the reason for
that is your cost you’re a custodian of
the firm’s money and the firm is telling
you you can lose thousand dollars a day
it’s permission you to lose that it has
not permission you to lose 1,001 dollars
that’s number one it that this is a I
think people look at this as this is a
risk issue or a risk management issue
it’s actually an ethical issue for
everybody here you ethically do not have
the right the firm has not permissioned
you to do anything more than trea within
its guardrails so when you’re in a
position you need to be thinking about
all the things all the crate and this is
crazy you need to be thinking about all
the crazy things that could happen so
you do not lose the trust of the firm
and you can’t get that wrong alright and
then you know as you get as you gain
more experience and you work with the
risk manager more and more you will
develop rules for being a bigger trader
but at the start there really shouldn’t
be any one going over and and it we
won’t look at it as a risk issue we’ll
look at it as an ethical issue
we can’t trust you to stay within 500
dollars
how could you know how can we trust you
when your stop-loss is one hundred and
fifty thousand dollars and you’re short
a hundred thousand shares of beyond how
we possibly that can go from one hundred
and fifty thousand to a five hundred
thousand dollar trip and more pretty
quickly secondly secondly the market
that we’re in right now has so much
opportunity one trades not worth
stopping yourself out for the day even
as illogical as beyond was at 135 even
as you may think Tesla is up here at at
these levels and there’s a counter to
that that it’s going to 600 even with
the clvs yesterday even with this
particular stock there’s going to be so
many opportunities you have to keep
yourself in the game because there’s
just a lot of easy trades out there and
so I know that you all want to flex your
muscles and get big and take on a lot of
risk and think that’s the path to making
a lot of money there are a lot of
traders in the prop space who don’t come
anywhere near their intraday loss I was
at dinner with the trader who made and
I’m gonna approximate over the course of
two over the course of
about 300,000 and drew down made 300,000
over the course of a couple of days and
drew down guess how much what was his
biggest draw down he made $300,000
traded a couple of different stocks
mainly into stocks guess how much he
drew down yeah 30 okay and that would be
terrific right that’s still a 1 to 10
ratio what do you think he drew down 50
max 100 $3,000 in judo and so and and
swang just had back-to-back quarter
million dollar days and drew down almost
nothing gave it had some Poland’s where
he gave back some open profit but there
are people that don’t need to that that
aren’t taking pain in this market to
make pretty good numbers and I’m not
suggesting that you shouldn’t develop a
system where you draw it down a little
bit I’m just saying it’s not true that
you need to draw it down and make a lot
of money and so in dr. steam Berger said
something really interesting – one of
our really good traders the other day
which is one of the traders that he
works with who made so much money last
year I actually can’t even say it
because the number is just ridiculous I
mean the amount of P&L; that this
particular trader made he looks at it
this trader looks at it as and he has
risk limits on him as well he looks at
it as a challenge each day he’s so
competitive that he views it as a
challenge never to get stopped out in a
particular trade he’s not gonna let it
happen and so for you guys and and he’s
made as the numbers he made or as big a
numbers as I’ve seen and
you know so there’s our three different
ways to look at that’s a risk management
issue yeah III think that that’s not
sure about that and so and the other
thing is at the beginning what are you
really working on you know what are you
what are you all you guys in here
working on you’re working on being
working on being consistent that’s if
you can get to the point where you’re
consistently profitable it doesn’t even
matter how small the numbers are you can
get to the point where you can trade
every day put on your PlayBook every day
and at the end of the month your win
rates good risk reward is good Sharpe
ratios good you make money you’re
positive days are way more than or
negative days that is such a powerful
position to be in it’s only a matter of
time before you’re gonna be able to turn
the knobs up on resk and make more money
and I’ll say one other thing as well
which is at the start this is the worst
you’re ever gonna be as a trader this is
the worst you’re ever gonna be today max
as a trader it’ll you’ll never be worse
than you are today and so if this is the
worst you’re ever gonna be as a trader
okay why would you risk a lot of money
when this is the worst you’re gonna be
it doesn’t make any sense mathematically
you know save that risk for when you’re
you’re you’re better don’t dig yourself
into a big hole for when you get good
I can tell you that you know I know a
trader who was in a hole and but kept it
manageable and in one day because he
kept it manageable and had traded poorly
for an extended period of time but in
one day wiped out his home one made
money so those are reasons to consider
for staying one is staying away from
stuff and and look I will also say that
sometimes crazy stuff happens and we got
to deal with it but it doesn’t have to
so yeah so we’re back here and
reiterating my point is my thought in
looking at this was I hoped to be able
to get big and that was a decision I
made coming in today and taking this
trip on chairs
I’m really glad it turned right around
but I was going to be looking to do
something like the way it worked out
later anyway five sporting a little bit
I did see this consolidation and I was
looking for going after the title big
dog consolidation trades looking for
opportunities just short breakdowns so I
just actually passed on this one waited
I got back down here and then was just
sitting watching most of the day and
started using stop orders to enter into
some trades when it was breaking below
levels that I’d identified which you can
just pretty clearly see here my real
focus on here is how to get big
intelligently so I shorted chairs at 761
with a 780 stop that’s the color but you
know essentially dollar exposure aside
from my core position they’re at it
again after a relatively sure look and
you have a lot more experience than
almost anyone in the room and you’re
transitioning and and you know when you
talk about Sim trading you’re really
just talking about transitioning from
one platform where you’re live into
another platform where you going to be
live and that’s where you’re going
through that and and and good for you to
be thinking about how you get bigger but
even for you
transition is real even experienced
trader transitioning from one platform
to another
one environment to another I would be
focusing on being consistent as well so
the idea this is a this is a good
example of you developing a thesis you
finding a setup that you like you see in
confirmation and you executing on that
trade that is super if we can do a lot
of that in the first couple of months
that would be terrific that would be a
terrific goal for you and then from
there for us to say it let me really
lean on it
I like the intellectual exercise and let
me get you up but we’d be super happy if
we were sitting there seeing consistent
results and you were saying to us I want
to make more money I want to make more
money and and we were talking about from
those consistent results how to do that
yeah an important distinction is is I’m
using five hundred dollar position
limits and not an absolute day limit and
I’m only you know if I go if I lose two
or three in a day in a day I’m okay I’m
Donna down 1500 bucks or something
and that’s something that I want to you
know have a conversation about going
forward but you know say this is going
against me we’ll go and get into that at
the end I was very fortunate and that
when I really started puts eyes on just
never won against me and so I added in
here in here and here I got up to this
short and made you know the better part
of the dollar on it and just started
taking you know got down there seven
which identified as an area and started
taking size off and smaller so if in
each at seven six ninety five and six
ninety and then at 6 87 on a market
order the clothes and I went home short
with I think go back to that slide so
the one thing you want to check when it
breaks out of the BigDog consolidation
is you you want to see volatility of
price showing you that the buyers aren’t
there anymore and you want to see an
increase in volume in that an initial
down move confirming that the sellers
are heavy here more likely to keep going
so I’d love to see the volume at the
bottom of this chart as well but those
are two things to think about all right
go ahead so trade management I moved
this year as I said we’ve walked through
this already the stock did do all this
it moved really close really quickly and
then after that I was just looking for
consolidation breakdown opportunities
with the expectation of this stock going
out low today again the 45 for one
reverse splits some of the very unusual
things I was expecting this to just
trend lower all day and that absolutely
impacted how I managed to trade the stop
I was using hard stops after the first
couple minutes each time with only about
another’s risk and I brought them down
as the stock work twice worked lower I
just you know I kept manually moving
them down as trailing stops going into a
little bit more detail on day two and
three so I’d worked down to down to
shares over the day I can’t remember
which I came in with and then the next
morning I started rebuilding my position
and this is what I want to talk about
right here because there’s a little bit
of volatility at the open but nothing I
was not comfortable with then when it
broke below the opening low I added
again it back tested and you know held
the resistance there found foreign a
nice little wedge and yet again I was
shorting it again so I’m getting pretty
big I’m back up so I think shares short
because I hit this twice with both times
weren’t there and then I endured this
again I never went negative even with
what I had the position on I went from I
think up like up like one and this broke
above a resistance level and some things
and I didn’t have anything in place what
we talked about at the meeting earlier
today and again I was fortunate indeed
iddin do any take anything more off that
day so the ax
that you hit below the lows have a
different stop than your swings yes so
you want to be thinking that way so I’ve
got a swing trade on that has a stop and
a target and then I’m pushing it I’m
leaning on it those have a target and a
stop as well that are different right
and you want to stick to them and and
the extras that you added either you
needed to take profits in them in the
money or be out of them
yeah and that’s literally the exercise
I’m going through and what we talked
about this morning that’ll be the next
slide so it ended up working out very
well when I saw this was a high-volume
push down here I just took a lot off and
I basically you know that basically
closed out the trade at the end of the
day at around five dollars I had a
little bit left over that I took it just
below five the next day I don’t know why
it trended down to 350 it’s just a day
or two later and you know thinking of
stocks down to too much is I should have
just let it run but fast forwarding to
what we’re talking about I’m searching
for a consistent process where I can
automate and hopefully you know how
something in place that’s more of a
script instead of a manual stop and as
we talked this morning I looked at the
21 so this is the exact same day or
talked about this is the area where
would have gotten in trouble here’s
where I hit it going down and you can
see not well but there’s in the red line
is the 21 day moving average I
historically have used a 50-day in a
different period and for the way that I
trade it looks to me like that works a
lot better this is a really volatile
stock you know I wouldn’t have been
involved in there but it stays below it
stays below it big spike down comes back
up tests it it wouldn’t and I’d probably
use a closed so here’s where I’m getting
stopped out on these ads from here still
profitable but certainly keeps me out of
this problem and that’s something I’m
gonna be exploring now it’s your turn
what’s the most powerful reason you
found in this video to never exceed your
stop-loss in a trade let us know by
leaving a comment below right now
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