Mike Bellafiore is the co-founder of New York City prop trading firm, SMB Capital, where traders - new and experienced - are trained to trade equities, options and futures.
Mike is also the author of trading classics One Good Trade: Inside the Highly Competitive World of Proprietary Trading and The Playbook.
In this episode of Chat With Traders, he told host Aaron Fifield about the secrets behind his successful trader training programme, revealing the nuggets of trading help and advice he gives the traders under his mentorship. Read below for his thoughts on how to become a 7-figure day trader...
I call it small wins...focus on those incremental steps you need to take to get to the next level.Mike Bellafiore
On the first stages of trading...
For us we think about the development of a trader in stages, so the first stage is consistency and the second stage is sizing and the third stage is breath; expressing your edge in different ways. And the fourth step is sophistication in how you express your ideas.
So I always find the people I talk to often mess up what stage they’re in. A lot of people want to improve their sizing - they start trading and they have a little bit of success, now they just want to trade bigger, and trading bigger they wonder why they’re not doing as well as they would want. If you look at their results, a lot of the time they’re inconsistent. It’s because that they’re focusing on the wrong stage of their development.
We recently hired a trader who had a pretty good track record as a retail trader and we trained them up, put them through our first two parts of our trading program, polished the edges a little bit and said to them "hey, just do what you were doing as a retail trader…and lets work on sizing from your live results". And the trader was not doing very well, we had to take a step back and say the trader is not consistent and the trader's run as a retail trader, while it was ok, it wasn’t really long enough to conclude he was a consistent trader. So we focussed on consistency. Coming up with the daily process that they’re going to go through, understanding the set ups you trade best, and making sure that you’re trading them as much as you’re ought to be. Understanding the set ups you don’t trade best and getting rid of them. And so there’s a lot that goes into that.
On what constitutes a solid trading foundation...
For us, there are certain principles that go into a really solid (trading) foundation. If you go to the gym, and have a trainer, I will say to you what my trainer say to me: it all starts with a really solid core. So in trading if you don’t have a really solid foundation, a solid core, you’re not getting good results.
A good foundation for a good trader would be: are you thinking through your trade properly, are you controlling your risk, are the technicals aligning, and for the new trader, it’s really about developing skills, this is a skills game. And so you need to learn technical analysis, need to learn what news catalyst move stocks, learn what type of stocks you ought to be trading given your account, need to understand what your risk tolerance should be on an intraday level.
For us, what’s interesting, when we first started SMB in 2005, the way we brought traders in was very different to the way we bring traders in today. For us, our training is revamped every year, and even last year for the second part of our training, trader development, we implemented a whole new section on automated trading. I sat down with our head quant in New York, our floor manager and my partner Steve Spencer and we put together a new training program on teaching people on how to start as an automated trader, while they’re working on their trading discretionary skills to also be working on their development as an automated trader.
On his million-dollar trading formula...
So a fun experiment while I was putting together a presentation for a chat I did recently in New York, I came up with what we call the million-dollar trader trading formula. I came up with the variables that people ought to be thinking about for how they can make a million dollars in a year. That first part for me was having a growth mindset. And then having a passion for trading. Then having a real solid trading foundation, and then experimenting with different types of set ups.
After you experiment…you start to gravitate towards a niche. And to show that you have a trading edge in that particular niche. To work on getting better at that particular niche. Plus really trading your A+ set ups bigger, plus having talent. Plus using technology to play more offensive in markets. Plus being patient with how long it’s going to take to survive a learning curve, or to be good enough to make a million bucks net in a year.
And all of those things together is my fun way of coming up with a formula for a million dollar a year trader. There’s so many ways to make money as a trader and so there certainly is a best way for you and there certainly needs to be you discovering what your niche is, to find out how good you’re going to be.
People always ask me the next logical question, "how do you find out what your niche is?". I do think you have to experiment and I do think that people oftentimes go to a resource online and not do well in that learning and then conclude that I don’t need to learn anything, I can just learn it myself. When maybe the conclusion was that resource wasn’t best for my talents and for the way I think. You really do have to expose yourself to loads of ways to trade and those have to be way with edge.
On having a growth mindset...
There’s a really great book that we recommend traders read before they show up at our firm. It was written by Carol Dweck who is a professor, who wrote this book called ‘Mindset’. Really really great book. The hypothesis of the book is that if you come into trading and you think that your talent and your talent alone is going to dictate how you do as a trader, that’s called a fixed mindset. If you come into trading and think, well how I’m doing right now is how I’m doing right now, but I can be better tomorrow if I do A, B, C, then I can be a lot better, and that’s a growth mindset.
We found at our firm that the traders who have a growth mindset become very successful traders. A great example of that is at the end of the year, we ask our traders to come up with our yearly goals. And in 2016 one of our traders earned a green shirt. And at our firm if you net a million dollars in trading profits for a year, you get a green shirt, it’s a big honour to be able to hit this level. In 2017 this trader earnt a black shirt, which is for when a trader nets two million dollars plus in trading profits for the year. And when he sat down to come up with his yearly goals for 2018... bigger picture, "I’m also taking incremental steps to become a ten million dollar trader."
That’s what he wants to be, he’s not settling for being a black shirt trader, he is starting to think about the things he needs to do and start doing the work he needs to do, to hit that next level in his development, that’s somebody who has a growth mindset.
On how a discretionary trader can leverage technology...
When our guys get good and they understand their edge, we want them to play more offense. We want to make sure that they are alerted to all of the set ups that they really really love. So filtering technology helps traders spot and receive signals for all of the set ups that they really love. They are, during the middle of the day and after the close, writing code, simple code, to make sure that their filters are finding their favourite set ups. This is a huge value add to their trading and a huge boost to their PnL overall because it's ensuring that they’re in the set ups that they like the most.
And then another thing that our guys do, and a step further, is they may create a script for a particular set up that automatically gets them into a position. So let’s say you really love breakout trades, and you’re really looking for one particular stock to break out of a consolidation, you can write a script that says "get me long if it does…" and I can trade out of it with discretion.
Certainly another thing traders are doing more of, particularly the newer traders that are coming in, is starting and saying, I want this filter, I want this alert to fire every time a trade like this comes up, but let me backtest this signal in itself. So I’m getting these really great signals, what if I just really did get in everyday and didn’t overlay my discretion, what happens if I just got in and created some exit rules, how would that do. Or let me just test an idea overall that I couldn’t trade perhaps as a discretionary trader, but if the computer allowed it to work I could make some money.
A very large majority of the experienced traders have built models or partnered with junior traders to build models that supplement their trading. And there’re some guys who really moved away from discretionary trading and focused on building models and certainly newer guys have done that as well. I think the picture is as a trader in these days, as a discretionary trader with edge, these days you really want to be armed with technology tools to help you make better decisions and to get into more opportunities that are your strength.
On what's required to turn $100k into a million dollars...
In some cases, nothing, in some cases not much and other cases some other stages they worked on. We have had some traders who went from making $4,000 a month consistently to making over $100,000 a month consistently pretty much doing the same things that they were doing all along, they just did them bigger. They just made their trades with more size. They consistently pushed themselves outside their comfort zone whilst still being responsible to handle larger size.
We like to think about guys understanding their edge and giving a certain amount of risk for their trades inside their risk book. And then not really doing anything different after a period of success other than us increasing their buying power, us increasing their risk loss. The percentages of their intraday stops are the same.
Let’s just say you have $1,000 of intraday risk and on your best trades you risked 20% of your intraday loss and you had a really wonderful period of success and we wanted to bump you up. We would bump you up 20% the next month and your risk loss is $1,200 for the day and for your best trades you just risked 20%. And you keep progressing that way, you don’t really do anything different, you’re just trading your best set ups.
On the key to progress...
I call it small wins. You don't want to think about going from zero to a million dollars. You want to think about going from zero to being able to make $1,500 in a month. I would actually take a step back. When you first start trading, a very common step is that you lose too much money and a real step in progress is to lose less, a real step in progress is to trade flat.
And so after you make $1,500, you set the next goal. Maybe I want to make $4,000 in a month and then $10,000, and so you want to be thinking about what are the things you need to do to get to that next realistic step in your development. It is a process. We find on our desk it takes until year three before traders make substantial PnL. You want to come into this game being realistic about your learning curve. You can make some money in year one and good money in year two, but what we're seeing at our desk is, guys have all these resources, the best technology in the prop space, all the coaching and all the mentoring and plenty of capital to use at the firm, and still takes some time to get good at it.
You get the firm backing to make sure you can support yourself through those years but it still takes some time. I don't think about trying to go from 20-yard-line to across the field to the other team's goal line, I think about how do I go from the 20-yard-line to the 30, how do I get from the 30 to the 40, and just keep plugging away and keep working. Focus on those incremental steps you need to take to get to the next level.