From The PlayBook: Building Intuition

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Learning how to build your intuition is a key element of successful trading. Here’s a discussion on this from Chapter 4 (“How Good Can You Be?”):

Arggh is the topic of trading intuition misunderstood. Newbs think they are born with a “feel” for the markets and trade accordingly. Yeah, so it doesn’t work like that. Intuition is your trading brain telling you when to buy and sell. For the experienced trader, this is an invaluable indicator. One to be listened to and honed. If you are a newb, tell that voice in your head to, as we say on Twitter, STFU. It’s like a crazy old uncle you want to avoid at a family picnic. You will develop intuition through screen time, experience, and trader thought. Like TO did. There is no other way it gets developed.

When the Facebook IPO came to the market in May 2012, it failed miserably. Its IPO open price of 38 did not hold. During a discussion after the close, TO critiqued our desk during a trade review for not being prepared to short social media stocks. He made his points clearer in this email:

I really think the desk blew an opportunity not getting short social media plays. We all know we can only make money if FB goes up, but we should be prepared if the IPO sucks… and that’s where you go, to stocks like RENN and ZNGA… especially when they show their relative weakness right off the bat. They were crushing ZNGA in the premarket, flashing huge size on low offers. There are so many trapped longs who were long for no reason other than for today. Hey, I wanted the IPO to be good, too, but there’s no reason not to think of ideas to make money off of if it sucks.

I am beating myself up so much for not being the one to make a massive amount of money shorting these things. I have a contrarian radar in my head and for weeks, I avoided the social media sympathy plays because the price action was so bad. (I’m actually being contrarian by following the trend, how ironic.) Then GMan banks huge on FFN, and I can’t help but drink the Kool-Aid as well. I lost close to a grand on my personal account by getting long a few of them premarket on gap-ups. (Trading small! I just let them all trade against me because I was stuck thinking “wait, WTF is going on?”) We were all drinking the Kool-Aid on the open, trying to get long ZNGA with a very wide stop, thinking, “Wait, this makes zero sense; how much can this really go down?” I mean, if you were paying attention, you could have seen this coming for weeks… ZNGA was making new lows into the IPO date… nobody wants this piece of $hit. Even a leader such as LNKD looked very weak. Didn’t follow my intuition. I’m not time-machine trading; the foresight was there, but I didn’t listen. That’s why you have got to trade price action and not blind hope. If anyone should’ve nailed it, it should’ve been me. Hyped-up sector, speculative stocks, contrarianism—those are my roots as a trader.

Today was classic Wall Street “buy the rumor, sell the news,” with a different twist. The only reason anyone had to buy a garbage company like RENN was for this day, and the IPO can’t hold its opening price and traded dangerously close to getting below the IPO price as well. None of these companies had the right type of chart coming into Friday,
save for FFN.

Anyway, I’ll get off the soapbox now.

I responded:

You are not on your soapbox. You are totally right. Your ability to properly critique this day started when you created the FINVIZ list of social media stocks and started watching how they traded, which were the best, which were dogs, which moved together.

The trading lesson here is that TO developed the ability to accurately critique this day’s trading because of the prior months of work he had done. You build intuition through screen time and study. He had paid his dues to gain the insight to offer a better plan of trading attack.

You can be better tomorrow than you are today!

Mike Bellafiore

One Good Trade

The PlayBook

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