Contemplating Insanity Into My Trading

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I am one of the subscribers to the new SMB DNA program. I missed your mentoring session yesterday, but I just watched the recording and was wondering if you could answer one question for me.

I just also wanted to say that I read both of your books not too long ago and thought they were the best books on trading I have ever read (and there were a few). You boiled trading down to the core and explained very actionable concepts in simple terms. After every chapter I just wanted to start trading and test what I just read! So thank you.

My question is this: You talk a lot about risk/reward and only taking 5:1 setups. It does make a lot of sense to me. What I was wondering was this: if you have a particular entry price in mind and the stock reaches that price, do you always wait for a confirmation, for the price to move away from that level in your favor and confirm that support/resistance level? Would you only then you would put your stop at that original entry level and target at ~5 times? Does it mean that you never enter a position pre-empting the move in you favor, trying to catch a local high/low? Also, when you are trying to decide your stop and target before entering the trade do you give priority to a stop level and then from that see if there is a room to have a ~5x move to your target? Do you ever start with a target if there is an important technical level for a market to test and then from that just put an arbitrary stop?

Apologies for one question turning into several. You probably have a blog post about it somewhere already, so can just point me in that direction. It’s a painful topic for me because my mistake seems to always be that I put my stops too close only for the market to move in my initial trade direction ;).

By the way, DNA is a great program. I came from a sell side trading background where they just sit you in front of a screen, show bid/offer, and ask to take risk and make money! After several years of “punting” around I made a decision to go back to square one and actually learn how to trade, and I am glad I did. Looking forward to new software and more traders on the chats!


1) I use a risk/reward as a benchmark for new and developing traders. I encourage new and developing traders to make the easiest trades at the start as this is the worst they will ever be as a trader. I am thinking of the best way for a trader to start when I use the risk/reward of 1×5.

2) Experienced traders can use a risk/reward of 1×3 perhaps on swing positions.

3) Microscalpers and scalpers might adopt a risk/reward of 1×2 as their win rate will be near 70 percent.

4) I do not always wait for confirmation. This is a terrific question and the answer depends on how aggressive you are as a trader. An aggressive trader may not wait for confirmation and just buy on price. A conservative trader, like Shark from The PlayBook, will wait for confirmation. For example, Shark might not make one trade all week if his stock was not holding above VWAP, his favorite indicator, for a long position.

Yesterday I bought NFLX into the 300 technical level. I did not wait for NFLX to hold. I just bid in front of this 300 level and bought. When it hit 304, I exited 1/2 of my position. I had an uneasy feeling about any long overnights in momentum stocks like NFLX and FB, so I hit the rest near 303. This from a trader who has been comfortably and consistently buying pullbacks in FB and other momo stocks. I have no interest in potentially getting in the way of an insane government, even though the odds of a default have to be almost zero percent. Normally I would not have started selling that swing position until 308. So as you can see I do not have to wait for confirmation for all entries. Having said that I only make this buy if I love the technical level. Usually, I do wait for the tape and price action to more confirm my risk/reward.

I hope that helps.

Related blog posts:
A Sale is a Sale is a Sale!
The 800-Pound Gorilla in the Room: Exits

You can be better tomorrow than you are today!

Mike Bellafiore

One Good Trade

The PlayBook

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One Comment on “Contemplating Insanity Into My Trading”

  1. Thanks very much for answer. I kind of anticipated this explanation but its one thing when you are trying to convince yourself – completely different when someone else, with your experience, explains it to you. Makes you look at things differently.
    Thanks again.

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