I am All-In (a new trade)

Jan 20th, 2013 | By | Category: Mike Bellafiore's (Bella's) Blogs
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I have been thinking about a new trade, I am All-In.  I have been thinking about this trade for a few years and how it would work.  One of my guys during his review after the close on Friday is working on it.  Let’s start by reading his review (edited).

I went for it with an A+ trade.  I had 8 or 9,000 shares at one point.  Now maybe I

overtraded it but I ‘m working on taking shots when I think a stock is ready and it just looked 3 or 4

times like it was ready to blast off.   That is a play where I am gonna pull out 5 or 6 grand at least if

the trade works.

During The PlayBook webinar series, created as a prelude for my next book The PlayBook, we have discussed the concept of A+ trades.  First you build a trading PlayBook of setups that make the most sense to you.  Then you ferret out the best of those trades, which we call A+ trades.  We set risk rules for these A+ trades.  For the intraday trader if you see an A+ setup you MUST risk 30 percent of your intraday loss.  If you are swing trader you MUST risk 2-5 percent of your trading account.  This is a powerful exercise to help you trade bigger and make more P&L.

But what about the best of best A+ setups?  As a trader there are times when we are trading when we spot our A+ setups and just SEE IT.  By we just SEE IT I mean we see two things: a) the position has an incredibly high chance of working, b) the trade will work RIGHT NOW.  The ability to Read the Tape helps us SEE IT.

For this setup, perhaps also called the I SEE IT Trade, I propose you risk your entire day.  You risk your entire intraday stop loss.  So if your intraday stop loss is $3,000 and you determine you can get out of 15k shares with an average loss of 20c then you MUST have a position size of 15k shares.  You are All-In for this trading session, as they say in poker.

One thing to consider is the psychological risk for this trade.  A rip that bums you out is good.  A rip that causes trauma is bad.  If the rip causes trading trauma then get rid of this trade.  Trauma harms your trading while disappointment is just your journey to getting bigger.

Also, you may only see this trade 3xs a month.  These are special trades.  These are the best of the best A+ trades and only when you really SEE IT.  If you think you SEE IT 1x a day then we need to work on what this trade really looks like for you.

Finally this trade takes advanced trading skill and discipline.  Here’s how.  After you are All-In the trade should start to work for you immediately.  This is why you went All-In.  If the trade doesn’t work immediately then you MUST start piecing out of the position slowly.  Offer some out.  Offer some out hidden.  Hit a few bids.  Offer some more out.  Slowly and with trading care, get back to the size of an A+ trade.

I would love to hear your thoughts on whether you think this would work for your trading?

 

Mike Bellafiore

One Good Trade

no relevant positions

  • Bruss Bowman

    Bella,

    Great thread.

    My personal trade log for the last month is full of entries around just this thought.

    One of the things that I’m looking at is getting much finer grained view on my A+ trades. I’m looking through the distribution of my historic winners/losers. In the distribution of winners I’m looking for the biggest potential gainers regardless of what I pulled out of the trade. Then in both winners and losers I’m looking for key differentiation.

    The differentiations that stand out are:

    (1) Coorelation of multiple timeframes
    (2) Relative strength/weakness of the inflection support/resistance lines.
    (3) Convergence of inflection support/resistance, trend-lines, price-fulcrums (major price points, i.e. .00 and .50 for equities), trader-pivots for futures and I’m also now looking at market-profile data for a further edge.
    (4) Quality of tape/volume
    (5) Time of day
    (6) Market macro type (trending/non-trending) Market day type (range/trend)
    (7) Correlated market confirmation

    One of the metaphors for trading that I really like is the Ted Williams strike zone:

    http://www.hardballtimes.com/images/uploads/williamsgraphic.png

    I have this picture up on my wall next to my trade workstation.

    Ted Williams, *knew* himself well enough that he broke down each location in the strike zone by average. I would also venture to say that this expectancy distribution is even more skewed if it includes slugging average, meaning the higher average zones also had higher slugging averages.

    This picture has a *lot* of relevance to trading.

    Conceptually, I think of A+ trades as in the strike zone and greater than .300, meaning they all have a positive expectancy and I will make good $$$ on balance if I swing at pitches in those zones.

    Note: Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss)

    Like William’s *expectancy* by pitch location (batting average), there is a BIG difference in the expectancy in the distribution of one’s A+ trades. They key is knowing the minutia of detail in your playbook setups and then correlating that detail to a historic expectancy. This is a lot of detail to effectively manage but it’s an obvious path to getting better.

    Today I can reliably tell that a given setup is an A+ setup with my playbook and checklists but I cannot reliably (yet) quantify other than a pretty accurate gut feeling that a trade is a .300 or a .400 setup. So I continue to work on improving my ability to efficiently quantify the attributes of the higher expectancy trades (those .400 trades). Once I have the objective ability to develop a much more accurate heat map of my A+ trades by expectancy then and only then will I consider putting multiple risk units into those ideas.

    In theory this capital management strategy will yield dramatic improvements in P&L. Yet for me, I know that I can’t modify my capital management process just based on my gut. Doing so would subject me to the psychological challenge of having a losing streak reduce confidence in my gut instinct and a probability of a negative spiral (trading slump).

    Getting more size in the *best* setups is my primary goal in $Twenty13. The idea in this thread is one of the ways to get there.

    Best,
    -B

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