Friday, March 20, 2015

Best Practices in Trading: Creating Checkups for Your Trading

There's a lot to be said for a periodic checkup from the neck up.  It is easy to talk ourselves into trades, veering from our edge in markets.  How do we know if we're truly aligned with our best practices?  That's where checklists and checkups can be very helpful.

Today's best practice comes from Mike Bellafiore and Steve Spencer from SMB Capital.  They describe a twice-weekly checkup that helps ensure that junior traders are truly rigorous in their selection of trading ideas.  They describe the process that occurs on their trading floor:

"Each Tuesday and Thursday at 1:30 PM EST we meet in our firm training room in midtown Manhattan for...The PlayBook Checkup.  The PlayBook Checkup?  What, is someone sick?  No, there are no doctors or nurses present; just traders and developing traders.  This is a best practice that has helped our traders identify and maximize their trading edge.

Here's how it works.  A junior trader on our desk prepares a trade in template form--an SMB PlayBook trade--of a setup that makes sense to him or her.  Then, he/she presents this trade to other traders in our training room.  I host this learning session with tough questions to the trader regarding stock selection, a trade catalyst of lack thereof, preparation or lack thereof, thinking, and execution.  Here I 'checkup' on the favorite trades of our new traders--their edge.

The junior trader breaks down a favorite trade into five variables for their presentation (the SMB PlayBook Template):

a.  The Big Picture
b.  Intraday Fundamentals
c.  Technical Analysis
d.  Reading the Tape
e.  Intuition

Each day our new traders archive a setup that made the most sense to them before they leave the trading floor.  From these PlayBook trades they choose one to present under the pressure of constructive scrutiny during the PlayBook Checkup.  They know to choose wisely and be ready to defend their trade.

Some phrases heard in our training room during these sessions:

*  Yeah, don't make that trade again.  You are not going to make money trading plays like that.
*  Where could you have been bigger in that trade?
*  How the heck did we allow a Boston Red Sox fan into this firm?
*  You have to be bigger in this trade.  You are leaving money on the table by not being bigger.
*  If you are not going to properly prepare for a trade, what makes you think the market will let you succeed?
*  This is exactly the type of trade you can build a career around.

Here's what the PlayBook Checkup helps traders accomplish:

1.  Define their favorite setups
2.  Eliminate setups not worth their intellectual, financial, and emotional capital
3.  Guide traders to internalize their trading edge with their PlayBook
4.  Helps traders learn good risk/reward trades from their peers
5.  Offers them a trade review by a trading partner with a deep dive into a specific trade setup
6.  Provides a forum where standards of quality trades for our desk are set
7.  Teaches them how to think through their setups like a pro
8.  Builds an opportunity for us to bond, joke, and share a common learning experience"

This is a great example of how trading can become an effective team sport.  Steve and Mike institute the checkup as part of their training program, but in fact this is a process that any trader could implement with one or more trading buddies.  It enables traders to think about their thinking, hone their edges, and learn from each other.  The cumulative impact of engaging in such checkup review each week is significant.

Further Reading:  The Power of Teamwork in Trading