This is one blog post that I hope you never have to read.

Why? Because it’s all about failure.

The word “failure” has tons of connotations. Shame. Guilt. Disappointment.  Anger.

These are things that we try to avoid at all costs.

If the world were perfect, you would never run into failure in your trading career. I hope that you will never be in a hole that you have to struggle to climb out of. I sincerely wish you a phenomenally successful career where you have a continuously smooth, upward-sloping equity curve and you become superbly wealthy.

As for me, I know all about failure because I have failed—spectacularly, actually. When I started my career, it was in one of the most coveted spots globally—a proprietary trader at a big global bank. Pretty damn good for a 22 year old. Heck, very few 32 year olds could ever land a job like that. Indeed, as a trader, I thought that I was hot s*%t and on the quick and direct path to limitless riches. Instead, I dropped the ball. Spectacularly. When it comes to failure, I know it all too well.

Unfortunately for most traders, including myself,  our career is not a straight-up path. In the pursuit of profits and excellence, we have experienced our fair share of setbacks and struggles. We have taken our lumps and wallowed in misery, wondering when we would ever get back on track. And we know that, while we will give it our best effort and always strive mightily to improve, we will probably meet with failure and setbacks at some time in the future.

In fact to trade well, we need to tolerate failure. We will have some trades that lose, even if we are running well. We will have some losing weeks or months, even if we have a good year. We will do some stupid things from time-to-time, even if we end up profitable in that timeframe.  In fact, given that we are taking calculated financial risks,  it is inevitable that we will experience losses and setbacks.  To paraphrase Van K Tharp,  taking risks without experiencing the occasional loss or setback is like breathing in without breathing out. This reinforces the need to prepare for losses and failure  in our trading.

Obviously, this humbling conclusion begs certain questions:

-When faced with failure, how do we bounce back?

-How do we come back from failure and learn from it, in order to be better than ever before?

-What lessons can we draw from the past?

Because I have failed badly as a trader and come back, I hope that have something to share with the rest of you. If you can draw some lesson that helps you avoid failure, or to come back faster and more powerfully, then this post will have fulfilled its mission.

Defining Failure

Obviously, before we can go any further, we need to define failure. In a markets context, the first answer would be that failure is “losses”. Yes, P&L is a critical barometer of success. I’m just saying that there is a lot more nuance to this answer than “Were you profitable or not?”.

Imagine that you were up 20% per year on average for five years and then you are up 1% in the most recent year. Profitable, yes, but you would be content with those results? Probably not. Perhaps you had a good year in terms of profits but should have made two or three times as much because the market conditions were perfect for your trading style. Lastly, you could be down 2% in a year, but if market conditions were terrible for your style and your last drawdown in similar conditions was 10%, then you could even consider yourself to have succeeded, despite having lost money.

We need a definition of failure that accounts not just for profits but for how you are making decisions overall, relative to your expectations. As I love to bang on about, trading is all about making good decisions. Profits don’t magically appear out of thin air—rather, they flow naturally as a result of making sound risk/reward and process-driven decisions.

What we are really talking about is your performance relative to your expectations, in all aspects. The most obvious level is profits. One excellent trader can expect to make $10 million in a year and berate himself for failure if he makes only $6 million; another could be hoping to make $200,000 and feel that he succeeded if he made a $210,000 profit. We can also benchmark our performance according to other metrics, like win/loss ratio; average winner vs. average loser; etc. By way of example, one trader could strive for a 60% win rate and fail by only getting to 58%; another would be a success shooting for 40% and getting to a 43% win rate.

Similarly, you need to have a broad conception of how your trading style should perform under various market conditions—and use that knowledge to determine position sizing and other risk parameters so that you never threaten your account size in adverse market conditions. Thus, failure comes when our results are out of whack with realistic expectations for our trading style in market conditions.

If you are a long-biased equity investor and don’t make tons of money in an up 50% bull market, then even if you are up 15%, you have failed. If you are a day trader and want to go from making an average $1000/week to $2000 /week over the course of the year, and you don’t, then you have failed. If you were expecting to make a few research-driven trades per month and ended up with 100 poorly researched short-term trades per month, then you have failed—regardless of your profitability.

How To Come Back From Failure

Working with this definition of failure, we already have some idea for how to come back. There are a few basic steps, which I will outline below. But the precursor is to have an honest appraisal of how you are doing at that exact moment—and to resolve to do better. If you are unhappy with your trading results, fine, you are unhappy—but you can start right then and there to get better. Wallowing in your unhappiness will do nothing to correct your mistakes, and is likely to worsen your sense of distress. There is absolutely no reason to beat yourself up!

Step #1: Figure Out Your Trading Style

Like I wrote earlier, the key is to have your own style for making decisions. The most important step is here to make sure that you have a defined trading style. This is your way of doing things—how you get in and out of positions, how much risk you take, etc.  Ideally, it’s written down with a set of rules or guidelines that you try to follow.  Without an understanding of your style, you run the risk of flailing around in the markets with no clear plan, donating money to the market. As the saying goes, “Failing to plan is planning to fail”.

If you don’t have a plan or if it’s not well-formed, then remember this: if trading profitability is a business, then this is your business plan. You need a plan for how you intend to take money out of the market.  So, take the time to get it all written down and really define what you are doing. If you are just starting out and don’t have extensive experience with trading, then it’s okay to borrow a trading plan from someone else who’s successful. It can be a book, a course, whatever- just make sure that it works.

While failure can result from not having a plan, it can also stem from not having a plan that’s suited to your personality. If you are a research economist by training, then you should stop trying to be a day trader. If you are star athlete who excels at making in-the-moment decisions, then long-term trend following is not for you. If you are an experienced execution trader for a bank and start trading your personal account by swing trading in highly liquid stocks, then that almost certainly does suit your personality. Thus, a key ingredient to success is that have a trading plan which fits your personality.

As Steve and Mike like to point out, someone who doesn’t cut it as a day trader may have a fabulous career ahead of them—it just will be doing a different style of trading that’s more suited to their personality.

Step #2: Set Realistic Expectations

Once you have defined a plan, then you need to set expectations around it. The most important of these are the profitability and the drawdowns that you envision. You should know if your plan will be “slow and steady” or a rollercoaster ride. That way, you can benchmark your future profitability against some kind of measuring stick. If you are trying to make 20% a year plus, then you should know that in advance of looking at your P&L statistics.  You should also judge it against the risk being taken- defined as the potential drawdowns. If you expect only 6% maximum drawdowns, you should also have some idea of that in advance—and be happy with 4% drawdowns and extremely unhappy with 10% losses!

If you are coming back from a perceived failure, you need to have an idea of how you think you *should* be doing, and then evaluate in comparison to that—and ignore other comparisons. For instance, if your neighbor is up 40% one year while you are up “only” 20%, then it’s natural to be a bit envious—but if your style is lower volatility and you know that a 20% return is at the top end of what your trading style can produce, then you can rest easy and ignore the comparison. Focus on your results and how you are doing things, not on something that you can’t control.

Most people fail because they haven’t calibrated their expectations for different market conditions. After all, markets can change and you need to prepare for it in advance. You also need to understand how your trading style will perform in different markets. Obviously each trading style has market types that are more or less favorable—and you need to have a good idea of what P&L and drawdowns to expect in those different market types. As an example, if you are using William J O’Neill’s CANSLIM system, then you would expect a small- to medium-sized drawdown during bear markets for stocks and up to 100% annual returns in big bull markets. Market type doesn’t always mean bull versus bear. If you are trading forex, then think about how you would do in choppy and rangebound markets versus trending markets.

Failure usually derives from not paying attention to how you were making decisions. Thus, the next set of expectations should relate to how you go about making decisions. You want to make sure that you are checking each trade against your trading plan, so that you are following your rules. When you enter a trade into your record-keeping system, there should be a rationale that explains why you put it on—and how it’s consistent with your overall trading approach. That way, if you are long-term trend follower but put on a trade that was a just a short-term punt, then you need to realize that you slipped up in how you make decisions. In this department, set your expectations high – make  a commitment to have each trade in line with your system’s approach, consistent with your trading rules and well-documented.

Once you have explicitly and clearly defined your expectations, then you are more empowered to bounce back in your trading.

-First of all, you should have realistic expectations, so you are not going to beat yourself up for results that fall short of some lofty, blue skies expectations. Expecting to get every trade right or to make 100% per year is ridiculous.

-Secondly, you are much better prepared emotionally to handle drawdowns, because you can realistically forecast how much you will lose in bad market conditions—and try to outperform *that* goal, rather than futilely trying to make money when the odds are stacked against you and your system. You know how to persevere.

-Thirdly, by setting high expectations for how you make each trading decision, you are going to fine-tune your decision-making process, giving yourself a better long-term foundation for success. It will also divert your attention from just your P&L, putting even less psychological stress on you.

Step #3: Take One Step To Do Things Better. Then Repeat.

Now that you have a plan and realistic expectations attached to it, the route back from failure is simple. As we have discussed, you need to stay focused on process-driven goals, rather than just P&L ones. The best way to address this is to pick just one small element of your trading and to vow to do it better. Revise your expectations higher and work on it until it’s to a level you’re happy with. Then repeat.

As an example, imagine that you are a swing trader. Your rules suggest selling a stock when it’s up 20% and moving on to the next position.  While doing your research, you notice that some stocks continue to perform after they’ve gone up 20% because they have extra institutional buying support that the other winners don’t have. You use this information in the most straightforward way—you revise your trading plan. You vow to devote extra focus to this one aspect—making sure to identify the potential big winners that have strong buying support and hold onto them longer, to capture bigger profits.

Now, while going about your normal trading plan, you are going to put more emphasis on this one particular point. You will still focus on executing One Good Trade at a time—not trying to shoot the lights out all at once, but rather making sure that each trade is individually sound. Now, you will pick entries and exits the same way but go that extra mile to look for extra buying support. It becomes easier to close positions that don’t have that support and also to hold onto the big winners. Thus, by tightening up just one aspect of your approach, you can measure directly how that translates into your overall results.

Moreover, that one aspect of your trading is not in isolation—it has a knock-on effect on all facets of your trading. Continuing this example, in learning to look for institutional buying support, you have become a better tape reader. This in turn enables you to pick better entry points or to start timing better your exits. Another example—you focus on cutting your losers faster. By examining more closely your losers, you notice certain ongoing patterns in those quick losers—and stop entering positions that demonstrate those patterns. Your results improve on the back of this.

Thus, the road back from failure is not a road—it is a series of the most deliberate steps possible, one after the other. By drilling down to one very specific aspect of your trading, you start fixing a small problem  or upgrading a minor part of your trading. This ripples out into other aspects and helps you to identify the next step and the next solution.

Once you have done the prerequisite work, the road back from failure is straightforward. Instead of beating yourself, remember—“There is no failure, only feedback”. It actually helps us to know where to change—so we can focus on the process of trading at the smallest, most controllable level.

Put it under a microscope and figure out what you need to do improve it. And then do it, measuring yourself against the benchmarks you set. Once you are happy, repeat.

Other Tools

You can augment this process with other tools. I have discussed elsewhere trading and visualization (Check out Part 1, Part 2, and Part 3). In this case, you should enlist visualization exercises and see yourself executing your trading plan successfully. You should imagine feeling good about sticking to your discipline, about doing the things that you are trying to improve in your trading. This is the basic blueprint for successful visualization in trading.

Furthermore, you should visualize having accomplished certain process-related goals at a point in the future, using the goal-setting techniques found specifically in Part 3. For instance, you can imagine yourself having achieved certain metrics, e.g. a win rate above a certain percentage, or a certain maximum drawdown that you are comfortable with. Associate these metrics with the very same feelings of satisfaction and triumph that you would a certain P&L goal. Imagine the changes that you would have made along the way, both in yourself and in your trading, in order to better accomplish this goal. Rejoice in your coming back from failure, in your overall improvement and the massive changes that have resulted in your profitability.

By Bruce Bower | E-mail: Bruce [at] howoftrading.com

Blog: www.howoftrading.com | Twitter: @HowOfTrading

It’s time for Episode 5 of When The Bell Rings.

In this episode, I’ll give you some food for thought when it comes to your trading. We’ll talk about some distinct differences among traders regarding their approaches, and it should either give you some added motivation, or a boost in confidence.

I hope you get a lot out of this installment. Keep coming back for more in the days ahead, and of course if you find these helpful, then let me know!

Run time is 3:08.

Jeff White

Four Quick Ways To Get Better At Trading

Usually, the “quick fix” implies fixing something, but only temporarily and in a fashion that won’t help long-term.  Luckily for us traders, there are several quick things that we can do that can readily improve our trading. They are quick lessons, in that they don’t take much time to grasp, but their impact will be profound and make a huge difference in your results long-term. Some of these ideas I discussed at the beginning of the year as “8 Things to Improve Your Trading in 2012”, but that doesn’t make them any less relevant!

1. Understand risk/reward, not money.

In trading, especially day trading, it is quite tempting to think just in terms of money. We can think of how much we expect to make from a trade or on a per-day basis. Ultimately, this creates problems in our trading. We get so focused on a certain dollar figure that we forget the key lesson: take what the market gives you. If you’re trying to make $50,000 / day and the market conditions are not there, then you are going to stretch into marginal trades or just taking too much risk in general.  By taking too much risk, you are actually more likely to undermine your dollar figure goal.

How do we know what the market will give? We evaluate trades based on risk/reward. If the potential risks don’t justify the reward, then we don’t enter a into a trade. For instance, if your position size is too big and the slippage would cause undue risk relative to the potential return, then you are taking too much risk and should trade smaller size.  If market conditions just aren’t giving you enough good risk/reward situations, then you should be trading less frequently.

Van K Tharp talks frequently about R multiples, which are essentially units of risk that you take. This is a brilliant way of expressing the concept, because it puts it purely in statistical terms. Every trade should have a positive statistical expectancy, whereby

(% winners * expected gain) –(%losers * expected loss) > 0

The amount that you expect to gain should be a multiple (X * R) of the amount that you are risking (R). Then, you set your R depending on your objectives—do you want to risk 1%, 2% or 5% of your account on every single trade? That answer depends purely on your risk appetite. Nonetheless, this concept forces us to quantify the risk/return tradeoff and to link it to the amount of risk that we are taking on a specific trade. It also gives us guidelines for better trading—if you expect a 3R winner, then don’t take off the position at a 1.5R gain—even if that 1.5R gain is a nice chunk of change! Thinking about risk/reward frees us from focusing solely about money and instead gets us thinking about risk/reward—the right mindset for a winning trader.

As Bella says, focus on “One Good Trade”. Your goal should be to make next correct trading decision and execute it properly, rather than to hit a certain dollar figure which could be out of line with market conditions. Remember, good trading is about good decision making. Learn how to trade evaluating risk/reward properly, learn how to take what the market will give, and you stand a much greater chance of reaching any goal that you set.

Task: Practice reviewing and new expressing trades in risk/reward terms, not in $ terms.

Time: 10 minutes

2. Find A Like-Minded Trading Buddy

Elite performers typically develop in clusters, as Daniel Coyle documents in his book The Talent Code. One reason is the access to coaching; the other is because the elite performers make each other better.  Trading is no different from any other performance activity. Working with other people multiplies our talents and helps us to overcome our weakness.

The goal of the interactions is to bounce ideas off each other, either about individual trades or about trading in general. You can talk about the ups and downs of markets, about how to do things better, and compare different trading methodologies.  Just having to state your ideas more clearly can be a powerful tool for double-checking them. Sometimes, they’ll just sound right and you’ll want to increase the sizing. Other times, you will just stop yourself halfway though and realize that your idea is not going to work. Trading is not easy; trading in isolation is even harder.

You could structure a regular kind of interaction – like a constantly open chat room or meeting up  at a regular frequency; or you could just leave it ad hoc, either when you want to share a good idea or to get something off your chest. The important thing is to have those channels of communication open with a like-minded person—two heads are better than one.

In selecting a trading buddy, seek out someone who is doing broadly the same things as you, otherwise you won’t be speaking the same language. A long-term trend following trader will have little in common with a day trader, and there is unlikely to be much in common between the two if you. If you are pursuing similar styles, then you’ll have a lot in common and be able to share a great deal.

Task:  Find a trading buddy with whom you can share and learn about markets.

Time: 5 minutes to get in touch and get on the same page.

3. Implement a Journaling and Review System

Keeping a journal is one of the unsung heroes of good traders. While the contents vary from trader to trader, they use it to record things including their outstanding positions,  performance, their thoughts on the market and their own emotional state. George Soros famously turned his diary into the book “Alchemy of Finance”. Just like talking to a trading buddy, the act of journaling helps us to work through our thoughts, thereby accelerating the velocity of ideas and their thoroughness. It only takes a few minutes a day to keep a journal but added up over time, the benefits are immense.

Journaling is a natural lead-in to reviewing our past performance. Every so often, we can go back over our past trades and review how we are doing—looking at statistics like overall P&L, winning percentage, etc. but also looking at whether or not we had a rationale for a trade and if it made sense. The journal will have all of that raw information ready to go. Added up over time, we can get an idea of what kind of trades are working for us, what we can do better and what we should stop immediately.

Moreover, if we are keeping good track our emotional states, we can get a good idea of how different emotional states correlate with our own trading results.  Ultimately, we can use a journal and a review process to know ourselves and our trading better and to make the necessary improvements in both.

Task: Start keeping a journal. Either buy a notebook or open a new file in your computer.

Time: 5 minutes

4. Set A Routine That Incorporates Rest / Relaxation / Recovery

We are human beings and not robots, so we need adequate rest and recovery time to perform at our best. Trading can be an extremely taxing activity, draining one’s brainpower and sapping emotions. We need to sleep enough in order to recover and have the energy necessary to face the day.

Moreover, we need  make time to relax if we want to be working at our best. In his book the Now Habit, Neil Fiore provides a novel solution for people suffering from procrastination, burnout and workaholism:  the “unschedule”.  In this, we schedule in advance lots of recreation and time with family and friends—and fit our work around that. Ideally, we would block out lots of time on the weekends and also some evening nights that are reserved for friends or family and also for something that we would enjoy, like a class or group activity. The author recommends this approach because it is the opposite of what gets us in trouble. if we are always working or thinking about work, then we don’t make time for play and can barely enjoy any recreation, in the rare event that we take it.

For overall well-being, we need to cultivate a holistic approach: get enough rest and make sure to enjoy  yourself away from the screens.

Task: Evaluate your schedule and make time for rest and relaxation.

Time: 10 minutes to reconfigure your schedule

All together, these only take a few minutes to do—what are you waiting for? Go implement them and let me know how your trading changes as a result.

By Bruce Bower | www.howoftrading.com | Twitter: @HowOfTrading

It’s time for Episode 4 of When The Bell Rings.

In this edition, we’re talking about something that’s paramount to your success as a trader. It’s a mindset – something that requires intentional planning and not a fly by the seat of your pants mentality.

A weekend sporting event prompted this particular lesson, although the topic always applies to trading.  Just as in sports we see the mood intensify around the playoffs, it’s that way in the markets every day.

I hope you get a lot out of this installment.  Run time is 4:26.

Jeff White

This morning it was announced that SXCI was buying CHSI in a cash and stock deal (story from Benzinga). Both stocks were gapping up significantly. It is unusual for the acquirer to gap higher in a merger that involves stock as a major component of the transaction. There is usually a huge amount of selling pressure from the “merger arb” funds who will short the stock to capture the deal spread. Also a large gap up will induce other shareholders to take profits initially.

Selling pressure often leads to a down move right as the market opens. So traders will look to short any weakness they see on the Open. In fact today my mentee Sammy caught a quick 1.5 point drop in SXCI after the market opened. Nice trade. But perhaps a bigger trade would be available later? We urge our desk to pay attention to the big picture during our AM Meeting. To pay attention if SXCI is accumulated after the initial selling pressure subsides. Are the bigger players viewing this acquisition as such a huge positive that they are willing to accumulate shares 6+ points higher than yestrerday’s close? If so, perhaps the stock will trend up later in the day. And perhaps have several days of upside follow through.

Also as traders we are trained to take notice when price action looks different. In the case of stocks that gap up a large amount we take notice when despite huge selling pressure the majority of the gap holds on the Open. Buyers willing to absorb selling pressure at much higher prices than the prior close usually leads to even higher prices.

In the middle of the day SXCI was accumulated. In fact there was a large spike in volume around 1:00PM which is a very unusual time for a stock to see a large increase in volume. I often hear traders talk about how they don’t want to get caught in a fake move in the middle of the day or moves aren’t real in the middle of the day. If the volume comes into the stock whether it is 8:00AM 11:00AM or 1:30PM the move is more likely to be real and see follow through.

One of our traders was very vocal about the accumulation. He also shared it with other traders in our chat room. His paying attention to the Big Picture allowed him to make a trade that maybe he would have passed on in the past. It also got a bunch of other guys on the desk involved as well. Great example of younger traders learning. And putting to practice what they have learned. Next step is getting bigger when the setup happens again. And it will. They always do.

Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 16 years. His email is sspencer@smbcap.com.

No relevant positions

*live trades discussed in this post took place in T3 Trading Group, LLC a CBSX broker dealer

Try all our trading tools for 2 months
*SMB Radar not included

Like any challenging pursuit with a steep learning curve, trading requires an incredible amount of determination in order to succeed. If we are successful, there is the temptation to look back to our beginning and to shake our heads at our combination of naiveté and the youthful enthusiasm that allowed us to overcome it.  While reminiscing, we can also ask ourselves: what lessons did we learn along the way that we wish we had known earlier?

Without further adieu, here are the top five lessons that a beginner can learn:

1. “A Hard Way To Make An Easy Living”—There is a saying among poker players that it is a hard way to make an easy living. While sitting at a table and playing cards is not physically tasking, the real difficulty lies in the ups and downs of your chip stack; the exhaustion that comes from concentrating intently for hours at a time; the psychological struggle of making a statistically sound bet, only to lose to a card flip that had a minute probability. Trading is quite similar. Viewed from the outside it can seem like traders are just playing a mindless video arcade game. However, that disguises the extraordinary amount of skill and effort required to be profitable, let alone one of the greats. Moreover, the mental and psychological strains can be enormous, especially when you are just starting out and trying to get your bearings. Much like poker, you need to be prepared for the arduous route towards success.
2. 2. Good Trading Is Anything But Glamorous—While a lot of people are drawn to trading by charismatic figures like Gordon Gekko or the madhouse atmosphere of Liar’s Poker, they are often disappointed by the reality.  Good trading requires early starts, long hours, intense concentration, earnest preparation, and taking superb care of one’s body and mind. Late nights, showboating and extravagant lifestyles have no place in the lives of most successful traders. The people who are initially attracted by the frenetic pace and energy of trading often end up quitting, disappointed by the intense and methodical pace that is required for success.
3. Risk Management Is The Key To Making Big Money – A famous Scottish proverb goes, “Take care of pennies and the dollars take care of themselves”. This is something that successful traders know and starting traders wish they did. While a lot of beginners take on excessive risk, trying to get rich in a hurry, they are often setting themselves up for failure. The successful trader knows to take small amounts of risk on each individual trade, never putting himself in a position where he can blow up; to seek winners that are bigger than his losers and to have a decent winning rates, knowing that the probabilities will work in his favor; to add to his equity every year, as it can compound significantly over time.  While a successful trader will likely not triple his account in a short timeframe, he will always stay in the game and make significantly more over the long haul.
4. All Gamblers Die Broke—There is an old adage that all gamblers eventually die broke. By definition, a compulsive gambler is always looking for “action”—to bet, even if the odds are not in his favor. Unable to control his compulsion, he will keep betting and keep losing. Good trading is the polar opposite—disciplined, cautious in its approach to risk and demonstrating a clear edge. We can rescue ourselves from the gambler’s fate by vowing to “bet” only when the odds are in our favor; by risking small amounts on each trade; by always keeping aside money that we will not put at risk. The results of successful trading are profitability and wealth accumulation, worlds apart from the gambler’s fate.
5. Learn From The Greats— Beginners are looking for “hot tips” or the next “sure thing”. They would be better off learning from the greatest traders. A lot of famous traders, like Bernard Baruch, Jesse Livermore and George Soros, have written books or done interviews that contain important lessons for beginners. Their words may sound cryptic, but they are golden if you’re trying to improve. Some of my favorites include:

• “The big money is made by sitting, not thinking”—Reminisces of A Stock Operator
• “I would say that risk management is the most important thing to be well understood”—Bruce Kovner, Market Wizards
• “Don’t ever average losers”—Paul Tudor Jones, Market Wizards
• “Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money” – Ed Seykota, Market Wizards
• “Wait for the fat pitch”—Warren Buffett

What we can learn from these quotes are the rules of success for trading—basics like cutting losses, letting winners ride and only trading when you have an edge. But more importantly, we get a glimpse into the mindset of an excellent trader—how they think about markets, positions, and what they are trying to accomplish. Ultimately, assimilating the thought patterns of great investors is the best way to become successful ourselves.

While investing can seem arduous at first, we can find immense joy in success. Certainly, that enjoyment derives from being profitable. While the truisms listed above will help you to earn more, they are also a product of a journey to success that was its own reward.

By Bruce Bower | www.howoftrading.com | Twitter: @HowOfTrading

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*SMB Radar not included

We received a few requests for a trade review of the AMLN trade I was tweeting during today’s Open. I’ve illustrated my key thoughts via the annotation of the chart below. Let me outline some of the “bigger picture” considerations that are not covered by the chart annotations:

1. It was reported that AMLN received a $3.5 billion takeover bid which they had rejected. A rejection of a takeover bid will put a company “In Play” and often brings other potential bidders to the table willing to up the ante above the original takeover price.
2. The reported bid works out to about $23.75 per share. The fact that AMLN was trading up to that level in the pre-market on heavy volume indicates that many large traders believe the bid was legitimate and other offers significantly higher will be forthcoming.
3. Once a stock becomes “In Play” related to potential takeover offers I immediately calculate prices where large traders may step in and start buying after initial profit taking occurs on the Open. 10% below the takeover offer is a price where a hedge fund analyst would recommend to their trader to start buying. In the case of AMLN that is around $21.39 per share (why this is the case is an entire other post and isn’t particularly interesting).

Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 16 years. His email is sspencer@smbcap.com.

No relevant positions

*live trades discussed in this post took place in T3 Trading Group, LLC a CBSX broker dealer

Try all our trading tools for 2 months *SMB Radar not included

One of our newest trainees (5 days live) had been trying to get a hold of me for a few days to answer some trading questions. I had been especially busy lately but finally was able to squeeze in a quick conversation with him before heading to the airport to visit some trading friends in Texas.

His first comment/question related to how he viewed his trading tendencies at the start of his young career. He felt that his natural “style” was to hold stocks for a longer period of time and it would be great if he was mentored by a trader with a similar sensibility. I said great. Holding winners longer generally is a good strategy He indicated that the main problem he was dealing with right now was holding on to losers for two long. I recommended visualization exercises and making sure he came up with hard stops and then visualized himself getting flat his positions that traded to that stop. Also to think about how he would re-enter.

We then moved on to what I wanted to talk about. Before meeting with JG I had reviewed his trading numbers from his first week. The two days where he made large chops were days that he got into stocks we had discussed during the AM Meeting. He did a nice job of holding those positions for bigger moves. I complemented him on the skill of holding his winners but also said that during his first few months of live trading he should defer to the stock selection ability of myself and other experienced traders on the desk.

Stock selection is a skill that one needs to develop. No different than learning to hit out of losers quickly or learning to judge the strength or weakness of a stock from reading the Tape. I suggested that each morning he should be picking stocks from the SMB Scanner in the pre-market and formulate trading plans but should not trade those ideas live until he had developed his “stock selection” skill. He would do this would be by identifying key levels in his stocks and developing trading plans and then after he finished trading the Open he would evaluate his selections. Once the majority of his ideas started to pan out I suggested he could then bring his own selections into the mix for the market Open.

Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for 16 years. His email is sspencer@smbcap.com.

No relevant positions

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My primary stock on the Open was GMCR. It is a classic momentum stock that had fresh news and a large pre-market gap. This type of setup is usually my #1 choice to trade on the Open if available. I have internalized the possible price patterns for this setup having traded it hundreds of times over the years.

My second choice was MCP a former high flyer that had announced they were buying a company in their space that would help them to vertically integrate their business. At least that is what it looked like in the article I read on Benzinga. MCP has been beaten down for the past year and was in a steady downtrend on pretty much every time frame. I thought that perhaps today’s gap up would be the beginning of a reversal of its daily and weekly downtrend. But if not there would be some money to be made on a gap fill.

Here is the video from our AM Meeting where I discussed which price action I would look for to determine whether to trade it long or short.

The bullish price action discussed in the video played out once the market opened so I got long. The annotated chart shows how I adjusted my trailing stops a few times during the day. I sold most of the position and will look to reload closer to 29.50 on Monday.

Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years. His email is sspencer@smbcap.com.

Steven Spencer is currently long MCP

*live trades discussed in this post took place in T3 Trading Group, LLC a CBSX broker dealer

In the fall of 2010 I wrote a post called “The Money Trade“. It outlined the mindset of momo hedge funds and how when they all decide to pile into growth stocks such as CMG, FOSL, CRM, LULU etc. you can quickly identify their fingerprints via after hours and pre-market price action.

A few days ago LNKD reported earnings and the AH/PM price action was indicative of our momo buddies. Here is the video of our pre-market discussion of how LNKD might trade for the day. Followed by a chart of how it traded later that day. SMB Fundamental #1 is Proper Preparation!

Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years. His email is sspencer@smbcap.com.

No relevant positions