This is a first-of-its-kind book that focuses on intraday proprietary stock trading written by Mike Bellafiore, a co-founder of SMB Capital, a proprietary trading firm in New York city. The full title of this book is “One Good Trade: Inside the Highly Competitive World of Proprietary Trading”.
This book is a pretty good book that goes through the ins-and-outs of being an intraday equities trader. Essentially it is the process that matters the most. You keep on making one good trade (i.e. good risk/reward, high win rate, in In Play Stocks, right size, cut your losses quickly, etc.) one after another, you can’t control results but by working on the process every day, you become a consistently profitable trader.
The desk prepares for the trading day each day by looking for In Play stocks, identifying their important levels, and shares their ideas during an AM meeting (starts around 8.45am). There is a midday review meeting, and after the Close, traders review their trading videos, update their journal, discuss trading with other traders, etc. Their day starts around 7-8am, and ends at around 7pm.
SMB Capital has become pretty famous over the recent years. Apart from this book, they were featured in Wall Street Warriors, StockTwits.TV, have set up a training website offering paid training, as well as uploaded quite a number of trading videos on YouTube.
The section I liked best about the book was actually the last 2 chapters which wrote about how Bella’s trading methods adapted to the different historical market environments. Different techniques are most appropriate for different market environments, and being able to adapt oneself to play the different environments would be key in trading long-term for a living.
Other good points that I got from the book are summarized below.
- Spot trading setups that offer a good risk/reward opportunity, with a downside/upside ratio of 1:5, and a win rate of 60-70%.
- Fewer trades are made during the middle of the trading day because statistically their win rate is lowest.
- Each trader must learn which trades offer the best win rate for them in their own style.
- Do not trade with size when your win rate is poor.
Information Required to Trade
- Level 2 prints
- Technical levels
- Average daily volume
- Short interest
- Average daily range
Time It Takes to be a Consistently Profitable Trader
- Allow 8-12 months to become consistently profitable.
- Results from your first 6 months of trading do not matter.
What Makes a Good Intraday Stock
- A good intraday stock is a “Stock In Play” that
- Offers 1:5 risk/reward opportunities (determined by where the support and resistance levels above and below the current price are at)
- Is liquid (can get in and out quickly without slippage)
- Will move 3-5 points intraday at a minimum
- Is predictable, e.g. some stocks move a lot intraday in an erratic unpredictable manner which should be avoided
- Gives good prints, e.g. when you bid near the bottom or offer near the top, you can actually get transacted.
Trading Against Black Box Algorithms
- You must be more selective to looking for plays where you will have an edge, e.g. momentum trade in a Stock In Play (i.e. stock where there is real order flow that will overpower the algorithms, and not just a stock which is moving due to short-term traders).
- You must identify the different algorithmic programs so you can trade against them.
Scale into a Position
- Do not start a position with your biggest size, instead scale into your position and wait for confirmation to load up.
- When you see a pattern change, buy one lot. When the bid holds, add another lot. When SPY spikes, add another lot. When a seller lifts, add another lot. Hold your biggest position only when more indicators are in your favor.
Doubling Down Doesn’t Work
- Doubling down doesn not work for the intraday trader. 85% of the time you will profit when you double down. But the 15% of the time you are wrong, you will get smoked. The losses during these trades will far outweigh the gains from the 85%.
- Bella tried to master doubling down during a range-bound market where it should work best, but it did not work out.
- If the xx bid holds with significant volume, get long and hold. If xx drops, then exit.
- If xx drops, then exit. If buyer reappears automatically, then it is a shakeout (my note: e.g. if it drops due to seller hitting the bids), rebuy.
- If the buyers are dropping out the bid, then buy into the dropout and hold until the uptrend is broken.
- Market-based adjustments
- If the market is weak, need to see more buying on the bid to profitably trade this setup.
- If the market is in an uptrend, will be quicker to buy when strength is perceived.
- Support Plays and Buying Pullbacks work well in an uptrend market.
- Be careful that on the Open, volatility is the highest. If you short a stock near a support level during the open, you need to scale into the trade.
- Short some near the level (e.g. 82) and wait to see if the level holds.
- If it quickly trades above the level (e.g. 82.17), short some more above if there is a resistance level above nearby (e.g. 82.25).
- If it trades above the resistance level, either immediately cover or watch to see if it holds above the level.
- If you cover and the stock does not hold above the resistance level, short the stock at the bids again.
- New traders should work on their skills in Reading the Tape and sell the stock on the offer when the tape showed weakness.
- Experienced traders trading multiple positions can enter trailing stops.
Reading the Tape
- Held bid
- Buyer buys 5-10x more shares at the same price on the bid and the bid does not drop. This is information that a huge order may be present.
- If we spot a held big often, we get long.
- Important intraday levels
- Important intraday levels are set by unusual volume at a particular price, e.g. a large number of shares are done at or around a particular price, and usually not in one singular print.
- If the stock ticks above this level and the bids hold, go long.
- If the stock ticks below this level and the offer holds, go short.
- Hold this trade for a longer-term intraday trade (e.g. a few hours). There was a huge battle so expect the stock to move significantly away from this level.
- The key to being a tape reader is locating where most of the volume is being done intraday. The volume may not show up on charts until after a significant move (my note: the smallest scale in most charts is 1-min, which is too long to be used to trade intraday in real time).
- Almost always we do not go long below support levels unless the tape showed the stock is strong.
- Stocks often pretend to break support levels and then trade much higher (i.e. a fake breakdown).
- One way to address this is to set to exit plan to not sell the stock until the offer held below the support level or the bid (after stock dropped below the support level) dropped further. E.g. 32 is the support, exit if (i) the offer held below 32 (i.e. sellers strong), or (ii) the 31.95 bid dropped (i.e. buyers weak), or (iii) there is an aggressive seller when the support level was taken out.
- Set a maximum intraday trading loss. When you first begin, set it to half of your median gross P&L. As you become more experienced, you can adjust it to half of your last best trading day.
- Tailor your trading based upon the time of day.
- Open is around 9.30am to 10.30am, Midday is from 11am to 3pm, Close is from 3pm to 4pm.
- Trade with the most size and most frequently during historically your most profitable time period.
- In periods where you do the worst (e.g. Midday), lower your tier size, keep your stops tight, make fewer trades, trade only your best setups, and only make trades that offer the best risk/reward.
- Into the Close, stocks are more directional so stick with those trending up or down in the last hour of the trading day.
- Traders are not allowed to lose more than 30% of what they made on the Open, because their traders did well on the Open but gave back much of their gains during the Midday.
Ending a Trading Slump
- Stick to your best setups, lower your tier size, visualize a positive day.
Trading to the Markets
- Asian Financial Crisis
- Relative strength plays and high-beta stocks, load up on stocks moving the strongest and hold until the closing bell.
- Bounce plays, when stocks open down considerably, get long to catch a bounce. Do not be the first to buy, let the market stop going down, then buy a little. Let the stocks hold higher and then load up when they do. Only take on huge positions after the market has stopped going down and the stocks and market has held higher.
- Internet Boom
- Highly volatile prices and you need to pay above the last print.
- Pullback plays and momentum players, exclusively on the long side.
- Bounces of 2001
- Buy on pullback and bounce of quality internet stocks, e.g. AMZN.
- To play a marketbounce (e.g. bounce off a SPY technically important level)
- Have a list of stocks ready to go with great prices.
- Near the level, buy just a taste of the stocks you wish to trade.
- Wait for SPY to hold higher. See which of the stocks that you bought are trading the strongest and buy more of these stocks.
- Below the SPY support level you must exit your stocks.
- Set plans to exit your stocks if they trade in your favor.
- To play a stockbounce
- The money trading a bounce is in waiting for the stock to bottom, trade up and find support, then seeing the stock hold at a higher price, and then getting long. Let the stock run, do not sell at the first sign of weakness.
- Scalping during the uncertain market.
- Scalping are for stocks that are not clearly directional. When stocks are trending, focus on where to load up with the direction of the trend.
- Bear market in early 2000s
- Fade stocks in the range bound market from 2003 to 2006. Find a Stock In Play and short it when it was too strong and buy it when it was too weak.
- When you fade, your upside must be 5 with a downside of 1.
- The tape should offer evidence that the stock is about to trade lower, hence implying a higher win rate.
- The stock should be at least 2 standard deviations away (2 moves away) from its correct temporary price. This is assessed by looking at how the stock trades for a few days.
- Uptrending market of middle 2006 to 2007
- Find strong stocks, buy into pullbacks, be patient.
- Buying on Pullbacks
- Know what sectors are leading the market’s trend.
- Buy market leaders and leaders in sectors that are leading the market trend.
- The stocks should pull back to support levels on lower volume (either average or below average volume to know that it is not a reversal).
- The leading stocks should pull back to support or key levels (e.g. past resistance, levels with unusual volume, levels with held bids or where buyers won a fight, moving average (14-day, 20-day, 50-day, 200-day SMA)).
- After entering into a trade, the stock should go up on volume, with high volume as the stock advances higher.
- If you are wrong, get out.
- Housing Crisis
- Short stocks based on intraday momentum. No fading, no buying on pullbacks.
- Traders began to trade leveraged ETFs (e.g. FAS, FAZ, SKF, SRS, SDS).
- Late 2009 and 2010
- Uptrending market, focus on Trades2Hold which are longer-term intraday trades.
- Find inflection points, intraday levels, and find ways to take positions following the trend.
- Build positions and trade around them. Hold them until the stock’s trend is broken intraday.