Statistics, chocolate chip cookies and trading

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If homemade chocolate chip cookies are made and I eat one, there is a 100 percent chance that I will eat many, many more.  If I fade a strong stock, there is a 70 percent chance that this trade will result in a loss.  Last nite we were visiting friends and our host made some chocolate chip cookies.  I ate one and then sat on the couch.  Quickly I rose from the coach and said to myself, “who are you kidding?”  I grabbed a plate, some milk, piled on a bunch of chocolate chip cookies and headed back for the couch.  Delicious!

This weekend is a great opportunity for you to better understand the importance of statistics and your trading.  At our prop trading desk in New York, our day trading desk, we teach our new traders play that are statistically favorable.  They are instructed to start their trading careers with only those plays.  And this works. 

I get a ton of emails from new traders looking for advice.  And I start with these questions.  Do you know the statistics for each of your trades?  Do you restrict your trading to only those plays or trades that are statistically favorable?  If not sit down and think about the trades that work for you.  Give them names.  For example our prop trading desk will only trade: consolidation, support, resistance, uptrend, downtrend, breakout, momentum, higher lows, lower highs, etc…..  If we spend the month making only these trades we will do well.

I had a great talk with one of our excellent experienced traders yesterday.  He has been struggling more than he should have of late.  And let me be clear- this guy can really trade and has made millions of dollars trading.  I have been peaking in on his trading lately.  And I noticed that he was too often fading strong stocks.  This is not a play that is statistically favorable.  He needs to eliminate this play from his playbook.  The data from his trading of late is meaningless.  It includes trades that must be eliminated.  I suggested to rid this play from his playbook and then take a look at his numbers. 

Today I am heading to a holiday picnic.  There are going to be homemade chocolate chip cookies.  If I eat one, I will then eat way too many.  I will let you know how that goes.

Mike Bellafiore


SMB Capital


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