Our Approach Makes the Most Sense (Really)

sspencerGeneral Comments, Steven Spencer (Steve's) Blogs, Trading Theory15 Comments

When I began trading in 1996 we identified the stocks we were going to trade from something called the “ticker”. This window that appeared on our trading platform identified stocks that were moving. We were taught to get long stocks that were going up and short stocks that were going down. We were momentum traders with state of the art technology that allowed us to take money from the hapless NASDAQ market makers each trading day.

Some traders decided that more time should be spent on preparation and identifying additional trading opportunities. I worked with two excellent traders in my third year using longer term technicals to identify stocks that were poised to make large breakouts. I also learned the business profile of the top 500 NASDAQ stocks so that I was able to trade them if news broke on a competitor or in their sector. A new service emerged called briefing.com that tracked earnings reports and other breaking news on publicly traded companies. As traders we were able to identify certain news items that would make a stock move intraday.

During the past nine years we have further refined what we believe are the best strategies for making money intraday. We recognize that the market will always change and we must add new things to our game. But the one constant will always be “Stocks In Play”. The idea is quite simple: If there is enough interest in a stock on a given day the best intraday trading setups will occur more frequently in this stock and work a greater percentage of the time.

Many prop trading firms have struggled recently. A large part of their struggles is related to the idea that they need broad market movement intraday for their strategies to yield positive results. This is a flawed model. It is great to take advantage of major intraday moves in the market. I know that SMB has had unbelievable results on these types of days.  But there is an ebb and flow to the market and you MUST have a strategy that will yield P&L on the days the broader market is quiet.

I was having a conversation earlier today with a trader at one of the top prop  firms in the country. He mentioned that last week his firm had very good results but that Friday hadn’t provided much opportunity. I said I was confused as Friday had been SMB’s best day in 2009. He said that the broader market didn’t move. I agreed. Almost all of the action was in the few stocks that were In Play. Because his firm’s best traders were more “market” focused as opposed to “stock” focused they were unable to generate much P&L.

Our goal when we started SMB almost four years ago was to create the best short term trading desk on the Street. The only possible way to achieve that goal was to create a framework for traders to extract profits from the market each day. So out of necessity we developed a comprehensive training program that emphasizes intraday fundamentals, skill development, stock selection, and the trading setups with the greatest risk/reward profile for intraday trades. Without All of these things we would have no chance of achieving our goal. Only time will tell whether they are enough…

Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 17 years. His email is [email protected].

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15 Comments on “Our Approach Makes the Most Sense (Really)”

  1. Sounds like you traded AIG last week when the markets were rangebound. Do you use a scanner for spikes in volume or just the most active list intraday?

  2. Sounds like you traded AIG last week when the markets were rangebound. Do you use a scanner for spikes in volume or just the most active list intraday?

  3. Curious….Do you have trouble getting short sales off…say on the opening when things are really moving fast?…Just wondered how all the banning of short sale tools has effected different traders and methods.

    Thanks

    Tim F

  4. Curious….Do you have trouble getting short sales off…say on the opening when things are really moving fast?…Just wondered how all the banning of short sale tools has effected different traders and methods.

    Thanks

    Tim F

  5. Finding the “Stocks in Play” can be one of the hardest activities a trader will engage in. I would love to hear about some of the indicators or sentiment news you may be looking for.

    Awesome Post!

  6. Finding the “Stocks in Play” can be one of the hardest activities a trader will engage in. I would love to hear about some of the indicators or sentiment news you may be looking for.

    Awesome Post!

  7. Dom,

    We find In Play stocks by one of two ways. We either identify them in the pre market based on the “Bella Checklist”, which lets us know which stocks are more likely to offer good intraday opportunity OR we have market scanning software to identify stocks that have unusual relative volume based on two different time frames. We then rank the stocks with unusual volume based on how far they have moved from their opening price.

  8. Dom,

    We find In Play stocks by one of two ways. We either identify them in the pre market based on the “Bella Checklist”, which lets us know which stocks are more likely to offer good intraday opportunity OR we have market scanning software to identify stocks that have unusual relative volume based on two different time frames. We then rank the stocks with unusual volume based on how far they have moved from their opening price.

  9. Tim,

    I don’t really understand your question. I have no trouble getting short on the Open. My only “problem” is the amount of money I have to pay to the clearing firm to locate certain stocks to short.

  10. Tim,

    I don’t really understand your question. I have no trouble getting short on the Open. My only “problem” is the amount of money I have to pay to the clearing firm to locate certain stocks to short.

  11. Andrew,

    As I said to Dom we have the “Bella Checklist” that has about 30 different criteria we use to identify stocks that are likely to be in play.

    Once the market Opens we have a few scanners based on rel vol, rel strength on diff’t time frames.

    But whether individuals make money trading these stocks is mainly a function of whether they have sufficiently developed their trading skills.

  12. Andrew,

    As I said to Dom we have the “Bella Checklist” that has about 30 different criteria we use to identify stocks that are likely to be in play.

    Once the market Opens we have a few scanners based on rel vol, rel strength on diff’t time frames.

    But whether individuals make money trading these stocks is mainly a function of whether they have sufficiently developed their trading skills.

  13. Andrew,

    As I said to Dom we have the “Bella Checklist” that has about 30 different criteria we use to identify stocks that are likely to be in play.

    Once the market Opens we have a few scanners based on rel vol, rel strength on diff’t time frames.

    But whether individuals make money trading these stocks is mainly a function of whether they have sufficiently developed their trading skills.

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