Eminis are futures contracts for various indexes, commodities and currencies. Eminis have their own trading personalities just as equities, and just as GOOG trades differently than WMT, each of the Emini contracts has their own trading personality profile.

There is no *right* market to trade just as there is no one trading style that meets the needs of all traders and market conditions. IMO one of the first keys to being a consistently profitable trader is knowing yourself, your own risk tolerance, strengths and weaknesses. Once you have that knowledge you can build a trading methodology and universe of trade assets that are aligned with who you are.

I trade both eminis and equities. However, I don’t trade all stocks nor do I trade all eminis.

Here are what I consider to be the strengths and weaknesses of eminis and equities.

Eminis:

Pros:

Leverage
Liquidity
~24Hour/Day market
No short selling limitations
Little or no slippage even for large trade size

Cons:

Emini markets are more price efficient so price volatility is lower.

There are only a handful of trade-able Eminis that meet my trading style. Days can go by when these assets are not “in play” or providing high probability reward to risk set ups.

Equities:

Pros:

“In play” stocks provide many more, high probability, high reward:risk intra-day trading opportunities than Eminis. Every single day there are many “in play” stocks and numerous high probability reward to risk set ups.

The universe of stocks that meet my trade criteria is much greater than Eminis.

Level 2 information, available in equities, gives an astute tape reader a valuable edge in their trading that’s not available to Emini traders.

Cons:

Less liquidity
Less leverage
Trading hours are limited.
Slippage has to be accounted for in risk management.

One of my main trading traits is risk aversion. So I align my trading with higher volume, liquid stocks/eminis that have clean charts and room to move from well defined inflections levels.

I also choose to trade those assets that are “in play” on any given day, assets with fresh news or some catalyst that sparks interest to move the asset with volume. I think of trading this way as “lower risk” volatility.

Every trading day there are equities that meet all my criteria so I trade equities a lot. However when Eminis are “in play” intra-day or for quality swing plays then I focus on these assets.

Personally, I prefer the way that Eminis trade so when they are “in play” that’s where you’ll find me trading.

written by: Bruss Bowman (former SMBU student)

no relevant positions

Hi Mike,

I have been trading awhile and am certainly getting better at it.

I have noticed a recurring problem. Whenever I get a good streak going and I start feeling like I’m getting the hang of it, I hit a losing streak. Sometimes it’s a week or two of gains everyday and then a slow meltdown to give it back. I do not lose it in a couple of trades rather a slow meltdown. Also, I have a problem on building on a good day. I many times start the morning off great and when I try to make a good solid day into a great day I just get off my game and slowly give back my good day as well. Very similar concepts just on different time frames (to talk trading jargon).
Generally, my analysis and ideas are very solid I just lose some discipline after being up on the day or on longer time frames being up over a week or two.

I’m sure you have thoughts on this problem, if you can share them with me that would really be beneficial.

BELLA

This has happened to me in the past as well as regards to having a good streak and then a bad one.  For me the issue is overconfidence.  There are streaks where you feel like you will never lose money again.  You take your median PnL and forecast your year from those numbers.  And then Mother Market enters the room and slaps that nonsense out of your trading head.

The overconfident trader trades with too much size in non conviction trades, does not lock in their gains, sets bigger stops than normal, doubles down and doesn’t prepare as well.  Perhaps you slide in at 8:15 instead of 7:30AM.  Perhaps you are long three lots in a B trade when you should be long one.  You move that stop to 50c rather than the normal 26c.  You add size in someone else’s conviction trade.  There is a very fine line between underperforming as a trader and trading like a pro.  The overconfident trader is an underperforming trader.

When I am trading well I glance at my PnL and voice internally: “Wow I didn’t realize I was up that much.”  When I am overconfident I look at negative PnL and internally pronounce:”I will make my day in this big position I have.”

So go back to the basics.  What are you best trades?  Get in more of them.  How should you prepare for each open?  Do that.  How do you take money from that market?  Make sure you stick with that.  Push yourself to improve each day with new plays and set ups with responsible size and world class review.

I hope that helps.

Bella

One Good Trade

Hey Bella,

I’m a relatively new trader as I’ve been trading for a little over a year now. The best plays that have the highest win-ratio for me are scalp plays. My question is, how do you know when you have enough conviction to act to execute, or consider executing, a trade on a specific stock? I understand every trader is unique and finds the best set-ups that he/she is confident in but, how does a trader measure conviction? What involved in your own mental checklist? What is the best way to consider the opportunity you have in Stock XYZ compared to the opportunity in Stock ZYX?

Just also want to say thank you for hosting the blog. It has been a major help to me from day 1!

Be real!,
Garry

Bella

A trainee wrote in a review this week about his trading: Too much impulse trading — changing my mind on a trade and bidding out, changing my mind on exiting a lot and putting it back on without a reason other than the first cover was a mistake, front running my stops, declaring things like “at this point, it shouldn’t get back there” and moving my stop to the 1c piker stop, things like that.

Bella: not sure i agree here. seems like you are building intuition here which is wonderful and was off. building intuition is an exciting signal of growth. thoughts?

Trainee: It’s possible I’m being results oriented. There’s a fine line.

for example, I’d get long FSLR at the 32 level when it’s holding above, 11c stop since there’s some accumulation below it (wicks), then it gets to .94x.96, pause, and I wouldn’t see the price rejection immediately… so I’d hit the .94 because I don’t want to get slipped and it doesn’t seem like itll work. Then it does wick back up and I get back in at 32 and just decide to honor my stop… and I take a 20c loss on the stop out, with a 9c slip. I was sort of onto what could happen, but I end up taking the slip anyway. When I see results like this in my trading, I just wonder what the hell I am doing and if I’m really thinking things out in advance. Maybe just screwy stocks.

Bella: me: yeah but sometimes there is just a voice in your head that says not this time. and you want to learn to depend on that voice and trust it

Trainee: true, sometimes im out early on a play and im not sure if it’s fear or intuition.

So the answer is that there is a trading voice in your head that says, “Buy” or “Short”. Through screen time, review of your trading, discussions with other traders, archiving of your best trading set ups, film review, reading, thinking, are re-reviewing you develop your trading intuition. And then you just trust that intuition.

I hope that helps. Great question!

Bella
One Good Trade

no relevant positions

I get asked this question a lot.  Here are my thoughts.

There is not one thing to say that would make the difference. There are not a few things I could write that would make the difference. This question ties nicely into a conversation I had just a few minutes ago in my office with a mentee, which I will share.

First, after you are consistently negative you should not be trading live. You should be on a demo. If we are working with a student and they are consistently negative then they are placed on the demo and asked to work on their playbook. Every day they should catalog a set up that makes the most sense to them in SMB PlayBook template form. The idea is to focus on the trades that you can make at this stage in your career profitably.

GMan developed a risk analysis sheet that crunches how a trainee should bump their trading size. Needless to say that you start at 100 shares and do not get bumped until you make money at this level. This severely restricts how much money you can lose intraday before you are consistently profitable.

New traders undervalue the power of being consistently positive. Too many new traders would rather lose 1k in a day than make $200. At least with these losses they are trading bigger. Trading bigger makes them feel more professional. There is nothing professional about losing money consistently as a trader. In fact that could be the very definition of amateur, or as we say “piker”. Respect trading losses.

Today Carlton, our floor manager, and I talked with a trainee about too many negative trading days from last month. To me this is a lack of respect for money. A good intraday trader ought to strive to pull out money from the markets 4/5 days a week. If you are negative two days in a row you ought to hold an emergency trading summit with yourself. What will you do tomorrow to ensure you make money? And then stick with those plays and lock in pulling money out of the market the next day.  Do not expand your trading outside of these plays.

This hyper-focus on making money forces the trader to hyper-focus on the set ups that are best for them. Sticking to these set ups while trading live then improves their results. Better results then builds a trader’s confidence. Improved confidence then allows the trader to find more set ups that are best for him.  It is a vicious cycle of profitable trading.

A typical pattern for the successful intraday trader is:
lose money
lose less money
flat
consistently positive
expand your playbook on other trades
add size to your best trades which grows your P$L

But if you are just at the stage of losing money you should not even be thinking about adding size. There should be no delusion that you are close to breaking out as a trader. You are not. Your next steps are above. And you are not going to get to the stage where you should be sizing up for many stages. So be realistic about your work ahead and be patient.

I hope that helps.

Bella
One Good Trade

no relevant position to disclose

Dear Mr. Bellafiore,

I am a daily reader of the SMB blog and I also really enjoyed your book.  I have e-mailed you a couple of times before, and I respect your opinion greatly.  I am writing because I am currently going through a difficult time with my trading.  I started trading at the beginning of 2009, and have been doing it ever since.  I have been fairly consistent in that I have never had a down month.  I had my best month ever in August of this year where I made over $28k.  I am currently up about $85,000 net for the year as I write.  This week, however, was probably the worst trading week I have ever had.  I lost money 4 out of 5 days this week, for a total loss for the week of almost $2k.  I felt like I could not do anything right, and it feels like I will never consistently make money again.  I have had periods in the past where I struggle, but I always seem to pull myself out of them.  I really feel like I have been struggling for the past month, even though I still made about $5k for the month.  It was not a consistent, steady $5k, but one with a lot of ups and downs, and probably more downs than ups.

I have tried to tell myself to do all the right things, like trade smaller and stick to only trading my best setups, but nothing seems to be working.  I will do it for a while, and then I will mess up on one trade and the bad trading just spirals from there.  It happened to me again today, where I was doing ok, up a few hundred dollars and then I got into one borderline trade, gave away my day, and then broke my trading rules in the last hour of trading.  I feel like I am at a crossroads here where if I don’t figure out a way to fix things and get on the right track, then this could be the beginning of the end for me as a trader.  I don’t want that to happen, but I also don’t want to continue to trade like this and feel like this.  Any advice you can give would be really appreciated.  Thanks.

If you made 28k last month you can trade.  Up 85k for the year is at least paying the bills so at a minimum this is another year of experience for you, another year of improving your trading game in the most competitive of endeavors.  Hey most can never become profitable.  Most are out in the first few months of their career.  And you are still here, and positive, having started during one of the worst trading years to begin since 02.  So some perspective, you can do it!

Hi Mike,

I seem to recall you mentioning that one way to catch opening drives is by watching the first ticks of the stock when it opens. My question is: do you trade the first ticks of a stock when the specialist is not there yet, or do you wait for him/her to show up?

Thanks in advance, and happy trading!

Bella Responds

Almost always I do wait for the stock to open. We know when a stock is open when NYSE first appears on the bid and offer. I would say that 90 percent of the time I wait for a stock to open.

I might not if the stock is really In Play and trading heavily in the premarket. I will watch to see very clear levels developed in the premarket and if the stock has liquidity and is In Play I may take a position if an important premarket level is violated. So if I am watching a stock and it is down 3 percent, normally does 2m shares a day and in the premarket it has already traded 1m, and I see a ton of volume at 30 and then the stock moves away from and below 30, I may get short using the 30 level as resistance. Certainly,yesterday with SPY was an example of when I might trade premarket.

The reason we generally wait for a stock to open is it is easier then to control our risk. The more liquidity in a stock the easier it is for us to control our risk. A stock that has opened usually offers more liquidity than one that hasn’t. Some traders even sit out the first 15 minutes of trading, for the stock/market to settle and when it is easier to control their risk, before they make a trade.

Bella
One Good Trade

I had an interesting meeting yesterday evening  with SMB’s options trainees  reviewing yesterday’s meltdown and the affect  it had on their options positions.  We spent the whole meeting dissecting trades that the options trainees had made during the day. breaking down what went right and wrong with each one and why.    It was a great meeting–real traders faced with the real issues that impact options spread traders on monster moves like yesterday’s historic sell-off.  Day’s like yesterday are rich with lessons that we can all draw from.

One of our trainees, Rob,   unable to trade manually while the market is open 95% of the time due to the nature of hisjob. He must operate through contingent orders placed with his online broker. This trade  management technique can work fine, but it takes some extra work, care and analysis.  Yesterday, Rob placed a stop order on one of his  iron condor positions assuming that his stop would be hit when the $OEX index hit 545. The dollar loss that would have resulted according to his analysis was within our guidelines  given the success rate and average gain that is typically made using this trading technique over the course of a year.

Unfortunately, by the time  his contingent order was actually triggered, Rob’s trade had exceeded, somewhat,  the acceptable loss level.   Rob was interested in why his analysis was apparently inaccurate.  The answer was simple, but not obvious on the surface.

An iron condor is a negative vega trade.  In English,  that means it responds well to drops in volatility and poorly to increases in volatility. Well it just so happens that yesterday’s meltdown generated  the sixth largest rally  in the history of  the  $VIX. Needless to say, when Rob was analyzing where to place his stop, he did not consider that to be a very likely outcome of the trading day.

So as a group we went through the process of how to incorporate bumps in implied volatility in a sell off into the analysis process for setting up a stop on a negative vega trade before the market opened. It turns out  that the stop, with reasonable volatility assumptions would have actually been five points sooner than Rob had anticipated. We then went through a simulation together of that actual   trading day using that volatility  assumption and, sure enough,  the stop would have occurred about five points earlier–saving Rob some money.

So the lesson is this: when setting stops on options spread trades, you must not only consider  the amount of the move on the stock or index  that you are trading, but the likely change in volatility which  that same move would bring about   in the implied volatility of the entire position.

This is a  really important issue  and can make the difference between a timely stop and blowing well past a tolerable  level of loss.

Seth Freudberg

Director, SMB Options Training

The SMB Options Training Program is a twelve month program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg:   sfreudberg@smbcap.com.

I have a question for you: Is conviction something you have to earn?? I know the question is almost rhetorical. But I listen to the older/experienced traders before, during and after the market on the Virtual Trading Floor and I hear the word conviction getting thrown around a lot. Especially when I am listening to Marc Sperling. When Sperling is doing his pre market talk to his traders regarding his thoughts and views about the overall market, he consistently says that ‘if you are going to ever be successful and make consistent money in the markets you need to have conviction behind your ideas.’

So I’ve asked myself this question ‘is conviction earned?’. I know the market doesn’t care about what I think, especially as a young developing trader. I feel conviction is something that very new traders cannot afford to have. But as I am now trying to progress out of a newbie trader, I am working hard on my position sizing. And in doing so I have had high probability great risk/reward setups that I have traded phenomenally well. But because I lacked that killer conviction I only traded those setups with 100-300 shares. And I do that consistently. So that brings me back to my question; at what point do we know that we have earned the right to have conviction? Not only on our trades but also conviction in our own ability.

Bella Responds
A touch after 7PM last night I left Steve’s office after reviewing the content for his free webinar today: From Good to Great. I headed back to my much smaller office, passing through a lounge area, when I heard,”Mike”. It was Sperls, still at the office and not looking like he was close to heading home. We soon turned to the email question above.

Sperls (all successful traders have nicknames) shared an important difference between the great intraday traders and those trying to become great is their conviction. Sleeves rolled up, Marc explained that this comes from years or being right and getting paid in good positions. Now on a roll talking about something he has internalized, Sperls continued that the best traders press their trades when they have conviction. If a position does not feel right to him then he adjusts his position. When he is trading well he is quick to exit his losers. When Sperls struggles (which happens to all traders even at the highest level) he is too slow to get out of his lesser trades. He made it clear, no crystal clear, that conviction is something you earn.

Bella
One Good Trade

Hi Steve,
I just have a couple of question regarding trend trading:

1) When you see a stock that’s trending but has already much more than its average range (i use ATR), do you skip/pass on it or would you still be buying into pullbacks? Do you ever find yourself thinking, “Ok this stock is just way overextended from its average range, i’m not touching it”?

This is a great question and something that I have discussed many times with new trainees. If a stock is not In Play due to fresh news then I am very cautious about trading in the direction of the intraday trend once it has moved more than its ATR. But if a stock has fresh news or the SMB Radar algorithm has ranked it as very In Play then I am not as concerned that it has achieved its ATR. In Plays stocks can move more than 2X their ATR intraday quite easily.

2) Do stocks typically have 2 legs of directional move when they trend intraday (looking at 5 min chart)? I’m noticing that a lot stocks that trend tend to move in one direction on the Open, consolidates for some time, then makes another leg of directional move. I don’t see many stocks making a third leg of directional move, but maybe that’s just me.

Many stocks will have more than 2 legs of directional moves intraday. Sometimes it can depend on the structure for a particular day, or overall market conditions at the time. I’m guessing you saw more than a few stocks that had 3+ legs last week as we broke out on the SPY.

Hi Bella –

I’ve been reading your book carefully and enjoying it very much.

I live in Las Vegas; and would much rather trade stocks than play in the casinos.

I’ve been an occasional end-of-day trader for over 10 years. Now, since last October, I’ve been endeavoring to teach myself how to day-trade. So far, I think your book is the best one that I’ve encountered on that subject.

My question is this: On page 224, you speak of the “intraday loss limit.” That makes sense. But, I found it somewhat contracted by your discussion on page 101 concerning “Happy Prints” who was down $100,000 — but was encouraged by his manager to keep trading.

Does this apparent discrepancy reflects the difference between a new and an experienced trader?

This is the difference between Old School training (none ) and new school trader training.  Back in the day there was just a risk administrator who might come over if he felt you were down too much.  This can cause all sorts of problems as a successful trader does not want the risk guy to manage his trading.  What does the risk manager know about his present positions?  A trader knows best how to determine his risk with the positions he is trading generally.  Today our intraday loss limits are preset.  These are agreed to by the trader and our floor manager.  If an experienced trader hits their loss limit they can ask to be reset but this is very rare.

From your recent blog, I get the impression that you expect a trader who reaches his intraday loss limit to remain at his trading desk and prepare for the next trading day. Do the concepts of “resilience” and the “intraday loss limit” contradict each other in any way?

Resilience can mean: 1) coming back strong after a day you were stopped out or 2) fighting back after starting down negative.  Resilience does not mean fighting back after you have ignored your intraday stop limit.  That is called being undisciplined and will lead to an unnecessarily  huge rip soon.

Also, for a trader such as myself (i.e., a 64 year old person living in Las Vegas — day-trading for a few months only), what would be the best way to begin to interact with your training program?

Reach out to Roy Davis, Director of SMB U.  He is an excellent resource to answer any of your questions.  You can reach Roy at rdavis@smbcap.com.

Thanks for the question.  I hope that helps.