One Good Trade and Then One Good Trade

This post is largely a book review for the book I just finished. I recently read, or listened to be more accurate, "One Good Trade: Inside the Highly Competitive World of Proprietary Trading" by Mike Bellafiore.

Despite the reviews saying the book was overly self-promotional, I do appreciate getting insights from a founder of a successful prop firm. It's not everyday when a prop firm is willing to share the principles that guided their success. Unlike most books, Mike did not follow a "self-help" approach where the author tells you to control your emotions, understand the strategy, importance of risk management, blah blah blah, and so on.

Mike took an interesting approach by talking about the characters that came on his (trading) desk. With every person that successfully made it or let go, Mike goes through the defining characters. There's a lot to learn from the progress of SMB Capital if you look beyond what you read. If you take the book in at face value, then you'll probably be the type of person that leaves a review saying the book was pure self-promotion.

While this is one of those books that you have to read a few times in order to appreciate its true value, I do have a few key takeaways. While probably nobody will ever read this post, I hope that my interpretation of this book is accurate.

Key takeaways for my personal trading development:

1. "One good trade": This phrase was often reiterated throughout the book. I really relate to this phrase, but I used a poker analogy and the decision quality concept outlined in Annie Duke's book. In poker, your job is to make the best decision given the circumstances. If this play led to a bad outcome, then you move onto your next play. This is pretty much what Mike is talking about. You look and analyze the available market information and you make a trading decision. If you get stopped out, that doesn't necessarily mean that it was a bad trade. We often associate bad with a negative outcome and good with a positive. This is a flawed way of thinking. Mike is essentially saying that you just look to take "one good trade" at a time. If you follow your system, then it's a good trade even though it leads to an unfavorable outcome. Don't let this influence your judgement too much, just move on and look for the next opportunity.
   
2. "Reading the tape": I believe this is really just an emphasis on understanding what drives price. A lot of people look at chart patterns like three white knights or three black crows. Unfortunately, they fail to realize what these chart patterns represent. When Mike talks about looking at the bid holding or failing, that's essentially a supply and demand concept. If there's no demand at a certain price, then the value of the security will drop to a price level where there is demand present. I think that a lot of people are asking the wrong question when they're asking Mike about how to read the tape. It could be looking at the DOM, but it's not possible for an opaque market like FX. Since I started off trading FX, looking at the order flow information is a bit different. Not only is this an opaque market, it is also decentralized. This means that my orders aren't anywhere close to the market. I'm just making a directional bet with my broker. However, it's not impossible to "read the tape". You can still identify weakening supply or demand based on candlesticks. the key to remember is that candlesticks look at completed trades or filled orders. The beauty of the markets is that there isn't one right way to make money. You just need to figure out what works for you.
   
3. "It's very difficult to teach tape reading": I personally believe that Mike made a very subtle distinction between teaching and mentoring. It's very difficult to teach someone how to read the tape and I largely agree. In fact, I have given up trying to be taught how to trade. Instead, I place a huge emphasis on committing time in front of a chart just to understand the market behavior. If you try to learn someone else's strategy, you will most likely fail because you're trying to learn their observations of the market. Instead, you need to form your own observations and figure out how to capitalize on them. The best that Mike or anyone else can do is to mentor you and mold your raw observations into optimized decision making. If you want to learn a mechanical or a set of rules to taking trades, you're better off working at a 9 to 5 day job. If you want financial freedom (especially from a retail standpoint), you need to commit chart time and figure out what works for you.

These are my three biggest takeaways from this audiobook. I do think this a must read for anyone who wants to focus on developing their trading mentality.