Give me six hours to chop down a tree and I will spend the first four sharpening the axe. Abraham Lincoln

An extensive FX training program is being created for a college investment club as I write. The creator is a Junior in college. A bright young trader visited SMB for a Tradecast from the Midwest during a summer vacation. He had just graduated high school. I get an email every week from a developing trader who is killing the market this year. Not a month has passed without him netting 30k. He is entering his senior year at college. @zmoose12 has caught the eye of the best @stocktwits and will be attending Bentley college in the fall. One of the rising stars in the trading community and a young twenty something @ldrogen has been trading since high school.

We have learned from The Talent Code, Talent is Overrated, and Outliers that no one becomes great at anything unless they engage in concentrated practice for many years at their craft. Before the Beatles hit the States they had the unusual opportunity to play live for ten thousand hours. Before Bill Gates dropped Harvard he was a stud programmer because he had been coding for years. If you want a tongue lashing from me go ahead and sit in one of our film sessions with a month of experience and tell me you “just had a feeling the stock was going up.” If you want to lose my attention during an interview tell me that you have a good feel for the market, though have never placed a trade. We call this trading intuition. And you only develop it after years of screen time.

Tiger Woods started playing golf when he was two. Andre Agassi was starved of a childhood save hitting tennis balls. LeBron played more basketball before entering the league with AAU, camps and an ambitious high school travel schedule than some NBA veterans. Why do Newbs try and pick up our game without any experience, without any trading skills, right after college? How silly would you think LeBron or someone like him if he showed up at Danny Ferry’s office requesting an interview for an NBA spot without ever having played? How about Agassi knocking on Phil Knight’s door talking a Nike endorsement without knowing how to hit a backhand?

Trading is skill based. You must develop a playbook of trading patterns that makes the most sense to you. To become great at these set ups takes experience, practice and a love for your craft. Only then can you become First Team Wall Street.

Future trading stars should start trading in high school with small size and an emphasis on risk management. They should be scouring the blogoshphere for domain knowledge. They should laugh with an @thereformedbroker’s post, learn technical analysis from YouTube trading king @alphatrends, peak in at a prop firm from our SMB Blog, argue under their breath at a call by @DougKass, DM @afraidtotrade about the structure of a trading day, read every last post from TraderFeed to develop your mental game, or classics like Reminiscences of a Stock Operator (Wiley Investment Classics), and email trading pros like @thekirkreport trading questions (we will respond). They should attend universities with trading labs. During the summers they should study at trading education schools. They should dabble in different products and markets. They should intern at prop firms and institutional banks. Most importantly, they should develop a track record.

After developing a track record then you will have the power to pick where you want to trade, what you want to trade and how big and not have to rely on someone like me to let you in the door. And you will have developed your trading skills so you can become the next King on the Street.

Mike Bellafiore
Author, One Good Trade: Inside the Highly Competitive World of Proprietary Trading (Wiley Trading)

Traders Ask (FOSL):
After making money at this level, i added a small amount with entries at .51 and a .47 stop. I have never had problems with these stops before, but as the bid dropped, i got filled at the .09. How do i avoid this in the future? Was it just one buyer in the stock? Was this stock not liquid enough? I don’t want the answer to be limit stops because when i am wrong, i want out, i don’t want to fight the position.

Any advice you may have would be helpful, as I am a “home alone” trader without proper mentorship options and I have been struggling to find the right setups for myself. I have had some moderate success with Morning game plan, and appreciate the education i get from watching SMB on stocktwits regularly as well as the blog and “One Good Trade” book. Dealing with Roy has been a pleasure also.

Bella Responds:

I checked the charts from that move right around noon in FOSL (8/10). You can see the wick on the candle. There are three things to consider: 1) Manual stops, 2) you just got screwed, 3) you didn’t understand your risk.

I hear it on the desk. I couldn’t get out. And then the banging and cussing commences. I might be in the same stock and I am thinking that was not hard to exit. With manual stops and quick reactions, fast trading skills, you often can exit your position without these rips. And you sit flat wondering what the heck is everyone complaining about. You weren’t fast enough young fella. We use sweep keys on our desk, with price limits, to exit most of our positions. Speed matters.

Sometimes in trading you get screwed.

There are times when a stock has tremendous risk that it will drop out. You need to spot this. Generally you need to reduce your position. This occurs mostly on the open, after a steep upmove, near important technical levels, in stocks with light volume, or volatile stocks. Does FOSL have a history of offering these intraday wicks?

I am leaning towards you got screwed. One of our better traders, MoneyMaker from One Good Trade, was in the same move and lost a quick 1k. It happens. Consider the other points above, but my sense is there was nothing you could have done about this one.

Congratulations on joining the league of traders who have gotten screwed!

Mike Bellafiore
Author, One Good Trade (Wiley Trading)

After the open we took the new guys into the training room for them to highlight their One Good Trade(s). I move to the back of the room, open up the floor for them to present any best trades to the rest of the class, and let the new class argue amongst each other. What do they need me for

One thing that gets my ire and receives this coach’s grilling is a lack of a well-thought-out trade. Argggh. These newbs are well taught. So says @alphatrends on twitter: good luck to all the new traders at @smbcapital going live with real capital this morning, you have been taught well . They know what they are doing. They can make trades their own. And then they say some stuff that needs correction. 1) The detail from their trades is not sufficient. 2) The logic is flawed.

So the first presenter All Charts makes a technical play. We make our guys name their trades (I name them)- so let’s call this an All Charts Technical Breakdown Trade. Not a bad name there. Expect it is not really a Technical Breakdown Trade. All Charts is not detailed enough. It was a Combo Sector Technical Breakdown Trade. Big difference. The FCX level break was accompanied by a breakdown in copper. So now we have a trade that should be held longer and given more room. This matters.

Next was Iron Mike Mike who used an 8 week chart to start his short position in BP but then covered using the tape intraday. We have a flawed logic issue here. Actually Iron Mike Mike made a tape move to move trade which made sense he just didn’t know it.

Everyone’s Best Friend made a nice technical trade in TIE but then covered because, “I wanted to book my first trading profit.” Obviously this is understandable but not a reason to cover. Let it run young fella. And I say that even though you would have been stopped out for a loss if you had.

All trades are plays. You judge them on whether if you made them a thousand times you would be successful.
Give them names. Make sure the exact details of the set ups are clear. Make the trade your own.

Mike Bellafiore
Author, One Good Trade (Wiley Trading)

Click on the picture above for the full review.

Steven Place writes for Investing with Options
Join him for StockTwits Brunch with Steven Place on Saturdays at 11 AM on StockTwits TV
For more about Steven Place see his new site: earningstrades.com

Trade:

8/10/2010 WHR $86.07 Buy 2 August 85/90 call spread limit price $ 1.65
target 3.00/ by August 17th
stop 1.10/or a stock close below 83

Reasoning:

WHR- looks like it found some support in the 85 level the past few weeks. A move above the 87.31 level should see the $90 level quickly (same day or with a few days). WHR acts like both a retail/housing stock and with both sectors stronger recently odds favor a push higher. If it closes below 83 then downtrend will resume. A weaker dollar and easy money should be a catalyst in the near term. On April 26th hit a high of 118.44 and has been in a downtrend since. Getting over the 200MA at $87.31 is first hurdle. WHR on July 20th raised it’s guidance but the market failed to respond however the bears haven’t been able to take the stock lower since July 20th with any conviction.

Today I found the hardest-working new trader on our desk  in Steve’s office, my partner, discussing how to get more out of your best trades. Steve explained the topic and remarked, “I thought you might have some ideas Bella.”

Yesterday we blogged about knowing you are in an A trade.  When Dr. Steenbarger visited our firm last year he was asked the most important attribute of a great trader.  Dr. S reponded,”The best traders know when they are right and press their advantage.”

I suggested that this new trader first determine which trades make the most sense to him, his A trades.  And then after being in such a trade he ought to rewind, replay and retrace this set up.  Go back and look at the chart for that set up.  Retrace exactly where you could have added size while controlling your risk.  Retrace where you could have taken some off.  Retrace where could you have reloaded.  Replay holding for enough of the move.

So with IBM today there was:
a) the starter position at 123.70 after a shallow pullback from 124
b) the buy into the pullback after it broke out above 124.25
c) and the aggressive add as it held above 124.50
Where you buy is not as important as rewinding, replaying and retracing where to add that makes the most sense to you.

Spend time mastering these set ups that make the most sense to you.  If Kobe knows in the next series he will be given three pointers off the pick-and-roll, then he will focus on preparing for these shots.  If you find a set up that you love and do not get enough out of it, go back and paper trade it again.  Of course the results won’t count but you will brand a better trading technique in your head.

Each week we share with you a trading pattern that we use consistently on our desk. Like most successful traders we have measured the win rate for this trade. In short we are giving you an intraday trading pattern that works. In this SMB Trade of the Week we will share with you a Resistance Trade in JP Morgan, stock symbol JPM. Perhaps you can make this trading pattern your own.

Let’s set up the trade:

JPMorgan Chase & Co., the second- biggest U.S. bank by assets, said profit rose 76 percent, buoyed by a $6.3 billion reduction in provisions for soured mortgages and credit-card loans from last year.

A 7.6 percent decline in revenue prompted some to question whether the profit report masked weakness in JPMorgan’s main businesses.

a) On our long term charts 40.80 was a technical resistance level.

b) In the premarket 40.80 showed resistance.

c) When we opened JPM could not trade above 40.80.
d) The tape showed weakness at 40.80.
GMan, our Head Trader, had the best results on our desk with this trade as he aggressively shorted this resistance level. GMan covered some at 40 and held some for a continuation of the downmove.

When we make trades we use three factors to make our trading decisions: intraday fundamentals, technical analysis and Reading the Tape. There was some negative news with a decrease in revenues from JPM. The tape showed weakness. And this was a technical resistance level on our intraday and long term charts. This was an excellent risk/reward shorting opportunity for us.

This is a Resistance Trade in JPM. Perhaps you can make this trading pattern your own. If you have any questions about this trade please send me an email, tweet, or post a comment on our blog. Please check out SMB University on StockTwits TV this week as we discuss in more detail trading JPM after its earning announcement. Also for active traders Brian Shannon from AlphaTrends and the SMB team will be holding a workshop on July 31st at our trading headquarters. For more information please visit www.smbworkshops.com. We hope to see you there!

Imagination is more important than knowledge…
Albert Einstein

We just got out of a Tradecast where one of our traders confused himself because he valued every level equally. All levels are not created equal. Before entering a trade you should ask: where can this stock go?

During our Tradecast New Trader Mike showed tape of APC where he had two levels 44 and 44.45. He treated both of them equally. Doing so caused him to miss a big move, which he originally was expecting. A resistance level from the day before during an uneventful trading day is not as important as a 5 day support level.

In this trade New Trader Mike didn’t buy 44, but he did short 44.45. That doesn’t make sense. The 44 level is the more important level. If you are an active scalp trader you can offer 44.45 and cover 44.07. But if you looking for a Trade2Hold, which is most successful in this market, then the play is long 44, add above 44.45, and do not short the 44.45 minor resistance.

Let’s say you are dating two girls. One with whom you are smitten, a 10 to you. And the other who is your summer fling. Are you going to put more energy into the summer fling or your 10?

Poor Mike got caught short a stock he wanted to be long. And worse he was not long a stock he wanted to be long. And even worse APC traded many points higher above the 44 in a most beautiful uptrend. But this was all because New Trader Mike did not value his levels properly.

I received this email from a reader:

Hi Mike,

I caught your stocktwits segment on Sunday (I believe) covering the TSLA IPO. Now… as I’m watching it drip lower I’m wondering at what level if at all would GS or the underwriter support it? Where would you look to get interested in buying? 18 looks like the line of defense for buyers.

Any insight would be greatly appreciated.

BTW- I attended the stocktwits panel in Pasadena. Unfortunately was not able to personally meet you as you were surrounded by people after the program.

SMB Responds:

Steve bought 18.03 and I bought 18.13 into the first downmove to 18. We both kicked it out on the way up to 19. I am still a little long as I write. For me 18, 17.55 and then 17 are our support levels for TSLA. 17 is our absolute line in the sand.

18 was the level TSLA broke out from the day of its IPO. So that is our first important support level. The more you love a level the more you buy near this level, the higher you are willing to buy near the support, the more subsets of support plays in your playbook you will execute, the more quickly you scale into a position.

One of our new traders poked his head into my office yesterday and asked,”What do you think of TSLA?”
I had read a few things about the IPO but nothing that led me to think it would be especially hot. The whole electric car thing is cool but I didn’t feel the hype (think huge margins and a ginormous upside, that an analyst would have trouble calculating- heck think GOOG circa 2004).
“Who is the underwriter?” I responded.
“Goldman and Morgan.” (GS MS and JPM were the underwriters)
“Hmmm. Well that is who you want as the underwriters. What is price range for TSLA?”
“14-16.”
“OK well we want TSLA to open above that range. And then hold above this range.”
Young Gun Leo said ok and then went back to his desk.

TSLA was really not on my radar until the Young Gun brought it up. Good stuff by him and then not still that young New Trader Jim for popping into my office this AM and talking TSLA. He mentioned that more stock had been sold and above the expected range of 14-16 and at 17.

These are bullish signals. We have Tier I underwriters, if not the dream team of underwriters. This is important because they have the capital to support their IPO. GS is not letting TSLA get below 17 without risking more capital at and above 17. They want more business so they will defend their deal. There was more demand for the stock and for a higher price than expected. All systems go here traders!

And then the tape showed strength at 17.55. 55c near the important 17 support the bids did not drop. I got long some here. I had gotten long at 19 and quickly offered out. Ooops. I actually paid 19 again and offered out quickly. Come on Bella show some discipline. And then I bought 18.50 when the bids were holding here. I hit out for a small loss. But I stayed with TSLA. I was buying any sign of strength on the tape. And this 17.55 finally worked.

Did I know TSLA would find 25? Of course not. I made a series of trades to be in a possible up move. Three didn’t work and one did. Overall this left me very positive in TSLA. But we did have important signals that TSLA might be a hot IPO.

And of course I cannot leave this IPO without sharing this thought. I was discussing how to trade this IPO with our new class after lunch in our training room. I remarked, “Doesn’t this deal have to work? Doesn’t GS and MS and JPM have to drive TSLA higher so they bring in more IPO business? I just read how a bunch of new IBs were hired on the Street. If IPOs like TSLA are successful then new deals will be around the corner. And that is big business for the big banks.” Just a thought anyway.

I will discuss trading an IPO on SMB University on StockTwits TV this Sunday. And I will discuss a trade I made in TSLA for SMB’s Trade of the Week Friday AM released first on the NASDAQ app on the iPad.