7 Steps to Building Trading Edge

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Hey Mike Bellafiore,

I’ve been following you for over a year now and have both your books. You post great threads too.

I believe the greatest challenge is creating that edge. Its rare to come across a mentor in this industry, especially if you don’t have your foot in a prop firm.

Do you have any recommendations about the best way to tackle the challenge of developing an edge? Does it have to be perfect? Can you settle for mediocre at the early stages of development and implementation?

There are several software that help optimize edges but for a guy who has no experience in it it’s a challenge.

I feel as though I have discipline, and patience but no concrete trading edge to implement……

Best wishes,



1. First learn how to trade.  Learning a trade with edge without trading skills will lead to trading losses.   Learn how to pick the best stocks to trade, read the tape, technical analysis, news catalysts that move stocks, manage risk, size your trades, think through a solid trade, etc.

Trading skill + trading edge = profits.

Trading edge – a lack of trading skills = losses

2. Learn different trading strategies and setups.  For short term traders effective strategies include: scalping, momentum trading, news edge, high beta technical analysis trading, low float stocks, Stocks In Play, unusual options activity, technical swing trading, breaking news headline plays, etc.

Then determine: What setups make the most sense to you?

3. Now practice those strategies that make sense to you on a demo/simulator.  See if you can build edge with these patterns in simulation.  There is no point to bet money in the marketplace before you have proved edge first on a demo.

4. Find trading tools to signal your favorite setups.  We say to be bionic!  It’s 2015.  Join the technology age.  One trader on our desk who has made the most progress has done so by building custom filters.  He was not very good.  Let me be clear- he sucked.  And now he is consistently profitably.

5. Record and tweak you favorite trades.  On our desk we use SMBU Performance Center powered by Tradervue to record our trade results and journal.  From these notes and stats we tweak our trading to build from our strengths.

Do you trade best on the open?  Do you trade best holding technical swing trades?  Do you trade beaten down reversal trades best?  This information is in your trading stats.  Find it.

6. Add new strategies where you can find edge.  Assume the trades that work now will not going forward.  Why?  Because they probably won’t based on market history.

Be prepared for some or much of your trading edge to one day be eliminated by the market.  That is why slowly adding plays to your trading is essential to sustain as a trader.  What works one day may not another.

This is the world we have chosen as traders.

7. Be patient.  There is a fine line between a trade with which you can develop edge and a trade with which you do not have edge.  It may take you some time to internalize a trade so you can effectively trade it in real-time.

Pro traders do not make real money for a good 2-3 years.  Relax, learn, and focus on your trading improvement.


Mike Bellafiore is the Co-Founder of SMB Capital and SMBU, which provides trading education in stocks, and options. Bella is the author of One Good Trade and The PlayBook. He welcomes your trading questions at [email protected].

*No relevant positions


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