Must read about what it takes to become a successful trader from @thekirkreport

Fascinating post about a new focus on the rotational training of professional baseball players.

A successful trader gives some hints about his shorting system for equity traders.

A statistical expert blogger discusses the odds of health care passing.

Using stats to improve our health care delivery.

Preparation for next week from Brian Shannon, @alphatrends.

SMB Traders will be watching this free seminar from Dr. Steenbarger of TraderFeed.

An advanced technical look at where we are at in the markets.

Quote of the Week:

“It’s not enough that we do our best; sometimes we have to do what’s required.” Churchill

In a recent blog Dr. Steenbarger talked about a vital skill for the intraday trader, reading the tape.  Dr. Steenbarger, aka the godfather of modern trading psychology, wrote: “My experience is that an understanding of (and ability to read) order flow is one important factor that separates the older, successful generation of daytraders from the newbies who only know simple chart patterns and indicator readings.”  I am one from this older generation of intraday traders.  And I thought this old-timer could share his thoughts on reading the tape and how it impacts the developing intraday trader.

In the past I have disappointingly heard developing traders state,”I am just going to focus on the charts going forward.  I can’t read the tape.”  I have heard this uttered on numerous occasions. Not one of these individuals became successful traders.

Recently, our newest class has moved from the first part of our training to the second part, Trader Development.  After the Close we answered their questions and discussed what was important on Day 6 of their live trading career. (Oh to be young again.  What was I doing on Day 6 of my trading career?)  And one of our promising traders discussed a trailing stop for a MS trade today.  Trailing stop?  My impression was this talented new trader had trouble reading the tape so was experimenting with these trailing stops to minimize this weakness.  This is not the right approach.  I counseled to continue working on the skill of reading the tape and to sell the stock on the offer when the tape showed weakness.  And I did so because this is what an older generation intraday trader, like myself, does.

And I offered an analogy about not learning how to read the tape.  To me not learning this skill is like a basketball player not working on their free throws.  This athlete just decides to keep clanging their free throws and give up some easy points.  This same new trader offered a better analogy. (Hey we hire smart new traders.  Obviously this analogy was much better than mine.  In the future I will take creative license to just use his idea as my own.  After all what is the point of being a partner if you can’t steal the analogies from your trainees.)  Back to this better analogy from the youngster who just started trading.  Not developing this skill is like the amateur golfer hitting only irons during his round because he never learns to hit driver.

I like that.

Still not convinced?  Let’s bring is some famous market players for further persuasion.

Exhibit A:  Steve Cohen of SAC Capital: “…everything I do today has its roots in those early tape-reading experiences.”

Exhibit B: Jesse Livermore:  ”A battle goes on in the stock market and the tape is your telescope.  You can depend upon it seven out of ten cases.”

Exhibit C: Linda Rascheke: “If you can learn to follow the price action, you will be two steps ahead of the game….”

Exhibit D: Paul Tudor Jones: “…..at the end of the day, I am a slave to the tape and proud of it.”

So learn to read the tape.  It will help you become a consistently profitable trader.  It will give you an edge over other intraday traders.

Best of luck with your trading! Don’t forget to follow us on Twitter!

The first time I met Dr. Steenbarger was in the smaller conference room of our proprietary trading firm in NYC. We were finalizing our training program and wanted the best teacher that we knew to review our work. He wasn’t being paid, he was just a trading coach offering a helping hand. As Dr. Steenbarger offered his critique I was humbled by how much I still needed to consider. There was more work to be done.

I have traded my own account through the Asian Financial Crisis, the Tech Boom, the Internet Bubble, 9/11, and the recent near collapse of our banking system. Today I run SMB Capital, a proprietary trading desk. Yet TraderFeed and Dr. Steenbarger’s writing is still essential reading for me. The Daily Trading Coach is no exception. It is simply a must read for the new, developing, and experienced trader.

As John Forman has done I should disclose that I am a proud contributor to the book. And I must admit my favorite part of this book is when Dr. Steenbarger makes fun of me for my overzealous contribution. Hey I was just trying to help.

When I first started my trading career in the late 90’s you learned through osmosis. You sat next to an experienced trader and when they had time (if they had time?) they discussed their trading. The market is more complicated than when I began and this model frankly is outdated. One of the new techniques you must master is how to coach yourself, even if starting at an established firm with excellent mentoring. Start with the Daily Trading Coach.

Often new and developing traders mistakenly believe that learning from the best trader is the way to become great. If only this were true. The developing trader must find the best teacher. Dr. Steenbarger is the best trading teacher that I know.

The other day I received an email from a prospective trader asking me if everyone on our desk put up identical P&L since they all have access to the same trading plays. The experienced and developing trader are I am sure chuckling politely as they read. Not every trader possess the same trading skills and mental development. Psychology is the 800 pound gorilla in the room on every trading desk. Dr. Steenbarger is the godfather of techniques to clear our mental hurdles. There is so much more of this in the Daily Trading Coach. 101 lessons more to be exact.

Dr. Steenbarger has insider access to Hedge Fund traders, Investment Banks and proprietary trading firms that few do. His years of experience working with these groups has armed him with anecdotes and lessons that he has again passed along. Thank you Dr. Steenbarger.

This book sits in my office in Manhattan along with many other great trading books. I find myself often of late, rising from my chair, heading over to my book shelf, and rereading sections of the the Daily Trading Coach, as I consider how to best mentor one of our traders. The Daily Trading Coach is a trading gift that keeps on giving.  

Check out the review on Amazon.  Don’t forget to follow us on Twitter!

One of the most difficult skills to master for a younger trader is holding a position for a larger move.  I’m going to discuss the reasons that I believe this is the case and some of the things SMB does to help its traders improve on this very important skill.  I will also briefly discuss one of the younger traders on our desk who has been working on improving this part of his game.

Here is a list of some of the most common reasons why traders fail to hold positions that trade in their favor.

1) The anxiety of holding a position is greater than the emotional payoff from the potential gain

2) The algorithmic trading programs are constantly fluxing on the Box creating the impression that the stock is not as strong or weak as the trader requires for holding the position

3) The trader lacks the confidence in their ability to judge whether a stock is “A Trade To Hold”

4) The trader hasn’t been in enough of these trades to recognize that statistically there is a large payoff over time

5) The trader has been able to consistently grind out money scalping day in and day out and does not want to move outside of their comfort zone

I would group the above reasons into two categories: internal and external.  A trader’s internal reasons for not holding a trade are related to their psyche;  how they feel while they are in a trade and immediately following a trade will have a major impact on their trading decisions.  A trader’s external reasons for not holding a trade relate to the information that they are receiving from their trading platform regarding the strength or weakness of a stock and the market or data they have received over time from certain trading setups.

How do we help our traders overcome these various obstacles?

1) On a regular basis we highlight the setups that call for a longer holding period.  These trades are highlighted in our AM Meeting and our Midday Meeting.  Also we will review these trades right after the market closes in our conference room.  We are trying to ingrain in our traders’ minds that certain scenarios are Trades To Hold.

2) We also will add these trades to our SMB IM so each trader on our desk is aware of them before they happen.  The alert tells each trader at what price to enter the trade and gives a price target and a stop loss price.

3) When A Trade To Hold occurs I usually establish a fairly sizable position.  I am as vocal as possible to let those on the desk know how much stock I have and how I am trading my position.  Hopefully this type of leadership will allow younger traders to feel more confident in holding their positions.  There of course is a danger with this technique in that each trader must develop their own trading style and if they become to dependent on another trader they most likely won’t reach their potential.

4) We have recorded many training videos that highlight the various programs and the confusion on the Box they are trying to achieve.  Traders feel more confident in holding their positions by having already identified these programs and understanding that they are just “noise”.

5) We will call guys out on the desk for not being in these great setups or giving up on their positions to quickly.  Trading is a very competitive field.  If you can’t respond positively to being challenged on making the correct trading decision then you most likely will never become a great trader.

6) We will talk about the guys on the desk who are stepping up their game to the next level.  This further instills confidence in them but more importantly acts as a motivator to their peers who think “if he can do that trade then I’m sure I can as well.”

7) We ask our traders to develop daily visualization exercises.  One of these exercises involves them seeing in detail themselves executing trades according to a trading plan they have developed.  The greater level of detail a trader uses in their visualization exercise the greater its effectiveness.  Honestly, this is the best technique for mastering this trading skill.  If each our traders actually practiced this technique on a daily basis we probably could spend a lot less time on the other things we do to address this issue.

The final thing I wanted to mention is the young trader who has been working on developing this skill.  He spends a lot of time each weekend looking at charts and doing visualization exercises on these longer term setups.  His work is starting to pay dividends.  On Friday,  he was in a MON trade, in which he was able to hold a core position for the entire 1 point move.  Great job!  For the other traders on our desk who only were able to capture 20-40% of the MON move, spend some more time on your visualizations, and talk to the young gentleman who sits to my right about how he was able to effectively trade around a core position for the entire Up Move.

Don’t forget to follow us on twitter.

“The Daily Trading Coach-  101 Lessons for Becoming Your Own Trading Psychologist“, written by Dr. Steenbarger is now being shipped by Amazon.   We have our orders in at SMB.  I cannot wait for my copy to arrive.

A few months ago I received an email from Dr. Steenbarger asking me if I would like to participate in his next book.  Dr. Steenbarger has visited our firm and offered ways to improve our training.  Dr. Steenbarger has answered numerous emails from me about how we can get better.  Dr. Steenbarger has taken personal phone calls from Steve and me about how we can train better.  Of course I was going to help.

But also I found the subject interesting.  Dr. Steenbarger asked me to share things that I do regularly to help my own trading.  Chapter Nine in his new book is a compilation of ideas from trading professionals on what they do that helps their trading.  These are ideas from real traders.  Traders who trade everyday and in today’s market.  These are traders whose ideas I want to read.

I spent the better part of the next five days working on my contribution.  I had one of our interns provide research assistance.  And we sent it in.  It was an assignment I enjoyed.

Dr. Steenbarger has announced the list of professional traders on his website.  My favorite post about the contributing traders is from Firebird who wrote, “Wow! This is like a dream team of trading!” So who would I be on this dream team?  I was kind of hoping that I could be Chris Mullin.  I was a huge St. John’s fan growing up on Long Island.  I remember sitting in the blue seats with my dad at the Garden watching Mullin’s teams battle the great Ewing teams.  There was Louie with his lucky sweaters.  Remember John Thompson teasing Louie wearing a copycat sweater?   And I can really shoot the ball so I think I ought to be him.  It is an impressive list of traders.  I hope you enjoy my contribution.

I have been trading for eleven years.  I have traded my own account for about a decade.  I have traded through the Asian financial crisis, the tech boom, the Internet bubble, 9/11, a range bound market, and the sub-prime mortgage mess.  I have been positive every single month in the past five years, save one.  Currently I have not had a negative trading day in over five weeks.  I have read hundreds of books on coaching and trading.  I have a law degree.  I run a trading firm that is recognized for its exceptional training program.  When I need advice, I contact the best trading teacher that I know.  I contact Dr. Steenbarger.

On a personal note Dr. Steenbarger has never once been unavailable to help us.  He is not paid for his work with SMB.  On a light note, Dr. Steenbarger signs every email and answers every phone call with Brett.  He tries to get me to call him Brett.  That will never happen.  Derek Jeter calls Joe Torre “Mr. Torre”.  They have known each other every since Jeter broke into the league as a 21 year-old rookie SS.  They have won four world championships together.  To this day Jeter refuses to call Joe Torre “Joe”.  To Derek Jeter he is always “Mr. Torre”.  And to me Dr. Steenbarger will always be Dr. Steenbarger.

I have had the opportunity to read some of Dr. Steenbarger’s book.  It is excellent.  My favorite part is when he makes fun of me.  But I am not gonna give away why.  Pick up the book.  It will be a great read.

Well today was a proud day for me and my partner.  Dr. Steenbarger, one of the top three trading coaches in the country, wrote a very nice blog about our training program (http://traderfeed.blogspot.com/2008/07/training-successful-traders-new-breed.html).  Steve, GMan and I worked very hard to develop our training program and it is a great honor to be mentioned by Dr. Steenbarger.  On our desk I always describe Dr. Steenbarger as the Coach K of trading coaches.  And as one of our talented new traders emailed in response to Dr. Steenbarger’s comments: “It is a great time to be a trader.”  I hope you enjoy the blog.