Mike Bellafiore at SMB Training has become one of my favorite traders to watch. His unique insight to the markets and perspective on successfully trading is one you will not find anywhere else. In fact, Mike’s One Good Trade was by far my favorite book of 2010.

Since our live interview last October, many of you have requested a more in-depth, focused interview. It is a tremendous pleasure to offer one for you today. We hope you find it helpful on your journey toward more success in the markets!

Q&A With Mike Bellafiore

Kirk:  Hi Bella. First off, thank you so much for taking the time for this interview. It is an honor to interview you once again and a privilege that you will share your perspectives with my members.

Mike Bellafiore:  Thank you Charles. Our traders are fan favorites of The Kirk Report.

Kirk:  For those who may not know you yet, please start today by providing a brief introduction of yourself and your firm SMB.

Mike Bellafiore:  I am Mike Bellafiore, co-founder of SMB Capital, a proprietary trading firm that sits in downtown Manhattan, and SMB Training, an educational trader training company. Also I am the author of One Good Trade: Inside the Highly Competitive World of Proprietary Trading, which has been called “the next trading classic.” I have traded professionally for over 12 years.

Kirk:  How did you first get started in trading and interested in the markets?

Mike Bellafiore:  I am not one of those who was interested in trading since 5. Actually I wanted to pitch for the NY Yankees. But in college I learned that was not a career option I needed to consider anymore.

Long story short, I was at a dinner party in NYC with my best friend from home, Steve Spencer (now partner), and his roommate from Wharton, while I was in law school. The two of them cornered me after two many imported beers, talking a first year take of $180k plus and a really fun job as a trader. It was a very convincing appeal (or maybe it was the imported beers?).

Kirk:  What would you say is one of the most important lessons you learned early on?

Mike Bellafiore:  In the late 90s and not to be glib……each lunch at your trading desk. The best traders are grinders. Didn’t Gordon Gecko in “Wall Street” say lunch is for sissies? Well trading is for grinders not two hour lunches, trips to the mall, and a midday siesta.

Kirk:  What were the most difficult lessons for you to learn?

Mike Bellafiore:  I still remember the 36k rip in CMRC. After having started to study technical analysis, reading a bunch of books and amateurishly concluding I had learned technical analysis – I learned quickly that I had no idea what the heck I was talking about when it came to technical analysis. Reading books and learning theories was one thing – developing skill another.

Kirk:  So very true! Was there anyone out there who helped you greatly during this time? If so, what did you learn most from them?

Mike Bellafiore:  I learned from one of the top 50 greatest day traders of all time (if such a list exists). I would ask questions when he had time (if he had time?), which was almost never. I learned mostly by being in a competitive environment where everyone wanted to be the best, gain a nickname like “Iceman” and be recognized as a top trader during our monthly blow out parties.

Kirk:  Who is the person you most admire in the trading arena?

Mike Bellafiore:  Dr. Steenbarger. No one has given more to the trading community without ever expecting anything back. His blogs are a treasure that all traders must devour. Presently I am not talking to Paul Tudor Jones.

Kirk:  I know it has been a big year for you and your firm. Can you tell us what you have been up to since our last interview?

Mike Bellafiore:  We are building an FX training program, an advanced technical analysis training program and an options training program. We are teaming with Trade-Ideas to offer a trading tool, SMB Radar, that should be on every serious trader’s desk.

Kirk:  What are your firm’s plans for the future and how are you improving what you offer?

Mike Bellafiore:  In the future we will offer a training program for the new trader. Presently we are the first stop for those most serious about being an elite professional equity trader. But through partnerships, tweaking our training, and some hard work, we will soon offer world class training for new and developing traders for all products.

Kirk:  Why did you decide to start a prop desk instead of just trading for a living?

Mike Bellafiore:  A much bigger challenge: to give everyone who wants to become a professional trader the training to achieve their goal. The market had changed substantially since we began and there was a need to create a training program that gave new and developing traders the best chance to succeed.

Kirk:  If you could change one thing about your trading career what would it be?

Mike Bellafiore:  I would have started SMB four years earlier. The education we share on SMB Blog and our training has positively influenced so many.

Kirk:  What would you say is the biggest difference between your training program and others out there right now?

Mike Bellafiore:  We treat our traders like elite athletes. There are four elements to become great at anything:

1. Acquiring domain knowledge

2. Motivation or sustained energy

3. Critical feedback

4. Purposeful practice (what we call simulation)

Most training is heavy on domain knowledge and lacks daily mentoring and the structure and tools to purposely practice. This is insufficient.

Kirk:  What is the your biggest pet peeve about trader training today?

Mike Bellafiore:  Again, an overemphasis on domain knowledge. Most training consists of some guru in a video or written blog or lecture as Franchise from One Good Trade would complain “waxing poetic” about some simple trading set up that makes sense to them. They talk at their students about a simple charting pattern. This is a nice first step. But this is not training. That is talking at someone. Teach, motivate, critique, and make them practice.

Kirk:  There are very good recommendations for anyone involved in investor education. In fact, hearing you say that clearly suggests that I need to emphasize the importance of critical reviews and structured practice, or at least show others how to do this on their own if they don’t do something like this already.

So, when interviewing prospective traders to join your firm, what are some of your favorite interview questions you like to ask?

Mike Bellafiore:  I’m not really allowed to interview anyone anymore. Seriously I have been benched. The firm view is that I am too tough on candidates. But if they would still let me I would ask the following: 1) Do you have a trading account and 2) What are your favorite trading blogs? I should add what do you think of The Kirk Report now that I think about it. If I receive a blank stare then they are out. Traders must possess intrinsic motivation to become great and if they do not have a demonstrable passion for the markets they probably should find other work.

Kirk:  When you examine the track record of a prospective employee at your firm, what are you really looking for as an indication that they will be successful?

Mike Bellafiore:  Something that took them a long time to become great at with little initial reward, a history of competitiveness, and low neuroticism.

Kirk:  That’s a very interesting combination. I can understand why you look for these thing things. I must ask, then, who is the best trader you have ever trained and why were they so successful?

Mike Bellafiore:  GMan presently. He was recently named one of the Top Three Traders Under 30. But, I suspect that the best trader I have ever trained I might learn about in the future as some find their own path outside of our firm, building from the foundation they developed with SMB.

Kirk:  Among the people you’ve successfully trained, what is a common problem you see most frequently?

Mike Bellafiore:  Trading on tilt. The more actively you trade the more likely for a trader to struggle with their emotions. We teach our guys vivid imagery exercises, which we learned from Dr. Steenbarger, to offer a different response than just frustration to that which sets them off.

Kirk:  I can see why that is such a big issue. In fact, I’m always frustrated by those who recommend traders “turn off their emotion” when you and I both know that when your money is on the line, emotion is always part of the equation.

I was recently asked by one of my younger members who is just starting college what courses they should take to help them prepare them for a career in trading. If you were asked the same question, what you recommend?

Mike Bellafiore:  Whatever you find most interesting! We become best at that which melds our passion with our talents.

Kirk:  Interesting response. I’m curious to know – if your son or daughter just graduated from college would you encourage them to become a trader? Why or why not?

Mike Bellafiore:  My dad told me when I was young to find something I enjoyed and stick with that. I would offer the same advice.

Kirk:  If someone wants to learn how to trade for a living, what steps do you recommend they take?

Mike Bellafiore:  As we read more and more about elite performance it has become very clear that elite training is essential for success. For example in the awesome book Bounce we learn there is little evidence of anyone reaching a high level of achievement without world-class coaching.

Kirk:  I couldn’t agree with this more. For example, my personal experience in mentoring others suggests there is no other best way to achieve high performance. However, beyond world-class coaching which is out of the reach of many, in your experience is there any real way to shorten the long and challenging learning curve that all traders must successfully navigate?

Mike Bellafiore:  Yes. Yes, Yes. And this is supported by the modern science of elite performance. Purposeful practice, what we call turning one trading day into ten, will speed your learning curve. At SMB we have developed a proprietary practice trading simulator, called Secret Project X. Our traders can trade specific set ups like Flag Patterns or Support Plays unlimitedly. New traders perform poorly not because they are not smart but because they haven’t developed their trading skills. It takes ten thousand hours of purposeful practice to master anything Malcolm Gladwell shared in Outliers.

If you are trying to get better at breakout trades you might sit all day and trade just one. Traders need a system to simulate their trading so they can turn that one day of experience into ten. We demand that our traders do the following each day to turn one day of trading experience into ten:

1. Keep a detailed trading journal

2. Talk trading with the desk

3. Think about their trades after the close

4. Watch video tape of their trading

5. Watch video tape of their trading with critical feedback from the partners

6. Perform visualization exercises

7. Talk with their mentor one-on-one about their trades

8. Practice on our simulator

Kirk:  Why do you think most traders fail?

Mike Bellafiore:  Traders fail because they do not develop the skills necessary to succeed. I wrote a whole chapter about this in One Good Trade including some great anecdotes about why some have failed.

Kirk:  I’m often asked how traders should find a good mentor. Do you have any suggestions?

Mike Bellafiore:  You need critical feedback to reach your potential in any performance field. A good mentor first is someone who cares, then is patient and finally can really teach. This is not necessarily the best trader but the best teacher (I wrote an SFO article on this important distinction). There are significantly fewer good mentors than good traders in the trading universe. Reach out to like-minded traders on StockTwits or in the blogosphere. Barry Ritholtz, from The Big Picture, has written that the trading community is very generous with sharing their wisdom. I have found this to be spot on.

Kirk:  One of the things I’ve talked about previously is the importance for a trader to find and develop a strategy that best suits their skills, interests, and personality. Would you agree with that recommendation?

Mike Bellafiore:  Yes. Find the plays that make the most sense to you and trade more of them with more size. A great exercise is to find a trade that made sense to you and made a chop. Go back and replay that trade a few times. Brand that trade in your head so the next time you can add some size and crush it.

Kirk:  There are many ways to trade, but all traders tend to find certain methods easier than others. While not forcing you to make an over generalization, what trading methods do you think are easier than others for people to learn and become successful with?

Mike Bellafiore:   Learning to trade off the order flow or Reading the Tape is the easiest way to start as a trader. Learning to trade off of held bids and offers, and levels developed by intraday volume can be understood quickly.

Kirk:  Very interesting, Mike. Are there trading methods you think tend to be especially difficult and should be avoided especially for new traders?

Mike Bellafiore:  Fading, taking a position counter to the majority of market players, is not a great strategy for most new traders to first learn. It’s too hard for them. We encourage our traders to follow the trend of a stock at the start.

Kirk:  That’s great advice. As I mentioned in the introduction, your book “One Good Trade” is by far my favorite this year. I know it also has been received quite well by others with excellent reviews at Amazon among other places. Why do you think the book has been so popular and well-received?

Mike Bellafiore:  Thank you Charles! And I am going to keep bugging you about writing a book.

I think the book has been successful primarily because we took the time to write a book that is jam packed with trading nuggets AND highly enjoyable to read. Look, we have read all the trading books and I am painfully aware of how hard many are to read. My goal was to write a book that was lasting, filled with important trading principles always wrapped inside real-life trading anecdotes, and also a page-turner. Fortunately, this is also how the book has been received.

Kirk:  Among all of the unique insight provided in your book, what do you think was the single most important thing you wanted to convey about trading successfully?

Mike Bellafiore:  Make One Good Trade and then One Good Trade and then One Good Trade. At Duke Coach K screams whether his team is up or down by 30, “Next Play.” I could try that at my trading desk but I would receive weird stares aback from my guys. So we say, “One Good Trade” and then “One Good Trade” and then “One Good Trade”.

Kirk:  Thinking back now after some time has passed, is there anything you would have changed about the book or added to it if you could do it all over again?

Mike Bellafiore:  Nah. I have another four books in me so I will get to anything I missed. I spent about 15 months writing One Good Trade. I gave it everything I had. Frankly, One Good Trade came out so much better than I ever thought it could.

Kirk:  Many traders who are struggling seek out The Kirk Report for help. So, with your experience, I’d like to ask you a question regarding how I should help others in this way. For example, when a struggling trader who has been successful in the past runs into a “cold streak,” what recommendations do you think I should provide to help them to get back on the right track?

Mike Bellafiore:  First, The Kirk Report is a great resource for traders to seek out help. So very well done by those who find you.

There is a great passage from One Good Trade about getting out of a trading slump. Seriously anyone who has had a good run in the market can keep going forward. And that is very important to share with them. Specifically, we tell our guys to slow the game down. Only trade your A set ups. Trade them with less size. Put up a positive number. And repeat this process for three days. After the third day they never remember they were ever in a slump.

Kirk:  Excellent! In our live interview last October you spoke briefly about how, for your firm, it is very much a “group effort” to trade. Unfortunately, those of us in the trenches who work alone do not have that same luxury. So, what suggestions and recommendations do you have for traders who trade on their own to incorporate some group and collaborative support?

Mike Bellafiore:  Develop an online trading community. Find your like-minded traders on StockTwits or the blogosphere, set up a Skype call with them during market hours, Gchat them, etc. On our desk we have the advantage of fifty pairs of eyes as opposed to one. I have access to fifty great ideas as opposed to just mine. Also you could contact Roy Davis, Director of SMB Training, rdavis@smbcap.com, and ask about how you can become a member of SMB’s online trading community.

Kirk:  A lot of traders tell me that they struggle with information overload. I’m curious to know your opinion of this and what suggestions, if any, you can offer to help those who seem to experience information paralysis.

Mike Bellafiore:  Information overload is just code for a lack of skill development. An elite tennis player can tell you where a serve will be hit before his opponent serves. He is picking up subtle cues from his opponent that allows him to calculate where the ball is going. This is the same with trading. Often new traders say they are confused trying to follow the tape and the charts. They just do not know what to look at and haven’t developed the skill to quickly break down the information. This is called chunking. When they learn how to do this there will be no information overload, just info that helps them make excellent risk/reward decisions.

Kirk:  I know your firm really focuses on monitoring trading metrics to determine key patterns for both trade identification as well as to improve trading performance overall. So, what information do you think every trader needs to have in their trading journal?

Mike Bellafiore:  We have developed an extensive trading journal. It is long, detailed, and takes a half hour at a minimum to fill out each day. So I will not answer your question since including every aspect would bore your audience or get me in trouble with my partners for giving away too much proprietary information. But I will share that every day you should find the plays that worked best for you. Write down as many details as you can possibly remember. Brand the play in your head. Run through the trade again and find ways you would trade it better with more size. Also GMan developed the SMB Chop Tracker which breaks down our performance daily.

Kirk:  I think what you have said here is good enough to go on, Mike. Thank you!

In last year’s interview and early in this one, you said that you teach visualization techniques to ensure that mental hurdles are cleared. Can you talk about this a little bit further and perhaps provide a teaching example?

Mike Bellafiore:  Sure. Let’s say you have trouble hitting stocks that strike your exit price. And you hold and hold and hold a loser. This is a very common trading flaw that can be corrected through visualization exercises.

Find a quiet place, and breathe deeply in and out for two minutes. When your mind is still, replay in as much detail as possible a trade where you failed to hit out of the stock. Bring in the sounds around your during this trade, what you see, and how you feel. Now see yourself hitting the stock. Breathe deeply again in and out. Replay this scenario. Spend fifteen minutes a day seeing yourself hitting out of stocks that have touched your exit price for a few months. This will help you build the mental skill to automatically hit out of this loser.

Kirk:  One of the things I like most about your trading is that you focus on situations that have an excellent risk-reward ratio. In other words, what I know about how you trade is that you are looking for situations that offer a “downside one, upside five” kind of setup. In other words, you know statistically the trade is going to work six or seven times out of ten and you wait for those setups to occur. How does a trader learn how to identify stocks with good risk/reward
ratios?

Mike Bellafiore:  This is very difficult if not impossible for a beginning trader. What a solid training program will do is introduce set ups that offer this potential risk/reward. Then the trading student works to make these set ups their own. And build their trading skill so that the risk/reward to them is really one to five. After the Open I march our new guys into our training room and recap set ups that were worth their attention and offered excellent risk/reward opportunities. And we talk through these trades. And questions are asked to me and at them by me. And so they learn.

Kirk:  One of the most difficult things for experienced traders to recognize is when it is time to abandon a strategy they have used successfully in the past but is no longer working. Can you offer any recommendation on how to identify when the time is right to move on?

Mike Bellafiore:  This requires good mentorship. Steve started calling the bottom of the market in 2009. Day after day he would say during our AM Meeting, “the market is turning.” And then when HFTs hit we quickly started moving towards Trades2Hold and eliminated most of our scalp trades as you could see from our SMB Blog posts. It takes a great deal of trading experience to see what plays will work best when the market changes.

Kirk:  Good traders always are looking for ways to improve and I’m sure that you do as well. What have you been working on lately in this same regard?

Mike Bellafiore:  Three-day trades. I am holding positions started after a stock had fresh news and trends well intraday on the first day. LDK above 10.80, CHK and SPY above 115.15 are recent examples.

Kirk:  How has your trading approach changed and improved over the years?

Mike Bellafiore:  I am trading on a longer time frame. This allows me the opportunity to trade with more size and be in more positions. Essentially I have been focusing on stocks with fresh news, letting them trend after the 10am hour, with a clear path for that stock’s long term technicals and unencumbered by the overall market.

Kirk:  In an age when high frequency trading and computer-driven programs are supposedly “in charge,” I think it is interesting to see that you have lengthened your time frames which is also something I’m seeing among many successful traders of late.

Can you share some of your personal trading rules?

Mike Bellafiore:  Here you go…

1. Never double down on a losing position.

2. Always hit a stock when it hits your exit trigger.

3. Put on 30 percent of your intraday risk for you’re A+ set ups.

4. First start with a Stock In Play.

5. Don’t exit stocks that are working until there is a reason to do so.

Kirk:  We recently learned through a study that many young people are shying away from the stock market and that most investors have been quite fearful following this year’s infamous flash crash. So, what words of wisdom if any would you provide to these folks?

Mike Bellafiore:  We do not see that. Our inboxes are at all time highs for interest in our firm. Three SMB members are needed to respond to all the interest. The upside to becoming a great trader is so amazing that interest in trading will never dissipate. That’s like saying it’s harder to become a rock star or play SS for the NY Yankees. So many are always gonna want to play.

Kirk:  How are you and your firm adjusting to programmed high-frequency trading? Is this something individual investors should
fear?

Mike Bellafiore:  I wrote a long article about this in SFO. HFTs cause more stops to be hit. They mask the true lack of liquidity in the markets. They will carve up active scalpers. We have been trading on a longer time frame and have chosen not to compete with them on most momentum and scalp trades.

Kirk:  Are there any tactics that individual traders can use to trade better in an environment ruled by Wall Street machines?

Mike Bellafiore:  Expand your trading time frame. Lay off the one minute trades and settle into five and fifteen and thirty minute plays. We call them Trades2Hold.

Kirk:  Finally, what is one specific thing that all developing traders could do to improve their results for the rest of this year?

Mike Bellafiore:  Follow some real pros daily like @alphatrends @afraidtotrade @weeklyta @tickerville @weeklyta @thekirkreport @stevenplace and so many others in the online trading community.

Kirk:  Thank you Mike! Again, those who haven’t read One Good Trade or who don’t follow the SMB blog should do so at their earliest opportunity.