Your Trader’s ‘Playbook’

I am a great believer in education. Whatever your passion or business I think that learning new things is a massively important focus. As a result I read (or listen) to books every day. Whether it is at home, the gym or even in the office. I try to keep up to date with what the greatest trading minds have to offer. Now one of my favourites for a long time was One Good Trade by Mike Bellafiore. Now this is based on Mike’s experience as a short term trader and the founder of proprietary trading firm SMB capital. It is a fascinating story of how Mike and his business partner Steve, select and train new traders. Whilst their short term stock trading is not a strategy or market i trade in, I found it fascinating to understand the complex psychological and motivational tools they used to help traders learn and improve. There was a lot that i was able to use in my own trading…and it is a pretty entertaining book!

So when I discovered that Mike had released another book called the ‘Trader’s Playbook‘, in spite of some of the poor reviews I couldn’t help myself so grabbed a version to read. I am only in the early stages of this latest book but there was a topic that he mentioned that rang a bell from his previous book. When i read it, I was reminded that the reality of this observation had been a key contributing factor to the creation of Traders Journal.

Mike explains how he helps his traders create and maintain a ‘playbook’. This is (as I understand it as a Brit) a term used in American Football that would contain each ‘play’ and exactly how it works. Where everybody is and how they interact to turn that play into a winning play. Each play will have slightly different objectives but when put together in a ‘playbook’ they should help the team win the game.

One of the similarities between a traders playbook and the version used in American Football is that the playbook is great in controlled environments, but of course neither a Football game or a financial market can be considered a controlled environment! In American Football there is the opposing team to think about. No matter how good your ‘plays’ are, you have no idea what they are going to do. Similarly in the market your ‘play’ can be bang on but the market can still chew it up and spit it out!

So I fell in love with the idea of a trader’s ‘playbook’ and got to work creating one. It contains all of my current strategies, setups and back testing results so I know what to expect and when to use each strategy. Mike however makes another hugely important point which I had never considered. The markets change, and just like in Football where the opposition will slowly learn and addapt to minimise and eventually remove the advantage your playbook gives you, the markets will do the same. It is simply not acceptable to sit around until one day the market has changed and takes back all of your hard earned profits. So I got to thinking, how on earth can you manage that risk!

This coincided with reading another formative book called The Risk of Trading by Michael Toma. This is a dry but vitally important book to read if you are serious about becoming a successful trader. Truth is that the professionals focus relentlessly on managing risk, not making profit. There is a reason why every bank and fund has a risk management department. Anyway this book explained how you could record and monitor simple trading data from your historically tested trades and current active trades to maintain a thorough understanding of whether the market you are trading has started to change.

This very concept forms one of the pillars to the Traders Journal and to my understanding of managing a profitable trading business. The Trader’s Journal, when used properly can highlight variances between tested or expected results and actual results. Mike Bellafiore in his book refers to ‘tweaking’ trader’s strategies and playbooks to maintain optimum profitability. This principle was one only historically available to the large institutions, until now.

Using this wisdom has already been transformational for me and my trading, now I hope i have created a tool that can support other traders to enjoy similar success!

Happy trading.

Tom

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