diff --git a/docs/source/command_line.rst b/docs/source/command_line.rst
index 8b8e7e6ee928..0161dd5eaada 100644
--- a/docs/source/command_line.rst
+++ b/docs/source/command_line.rst
@@ -49,6 +49,30 @@ for full details, see :ref:`running-mypy`.
     Asks mypy to type check the provided string as a program.
 
 
+.. option:: --exclude
+
+    A regular expression that matches file names, directory names and paths
+    which mypy should ignore while recursively discovering files to check.
+    Use forward slashes on all platforms.
+
+    For instance, to avoid discovering any files named `setup.py` you could
+    pass ``--exclude '/setup\.py$'``. Similarly, you can ignore discovering
+    directories with a given name by e.g. ``--exclude /build/`` or
+    those matching a subpath with ``--exclude /project/vendor/``.
+
+    Note that this flag only affects recursive discovery, that is, when mypy is
+    discovering files within a directory tree or submodules of a package to
+    check. If you pass a file or module explicitly it will still be checked. For
+    instance, ``mypy --exclude '/setup.py$' but_still_check/setup.py``.
+
+    Note that mypy will never recursively discover files and directories named
+    "site-packages", "node_modules" or "__pycache__", or those whose name starts
+    with a period, exactly as ``--exclude
+    '/(site-packages|node_modules|__pycache__|\..*)/$'`` would. Mypy will also
+    never recursively discover files with extensions other than ``.py`` or
+    ``.pyi``.
+
+
 Optional arguments
 ******************
 
diff --git a/docs/source/config_file.rst b/docs/source/config_file.rst
index 2cb150df0aea..ccd498183328 100644
--- a/docs/source/config_file.rst
+++ b/docs/source/config_file.rst
@@ -197,6 +197,18 @@ section of the command line docs.
 
     This option may only be set in the global section (``[mypy]``).
 
+.. confval:: exclude
+
+    :type: regular expression
+
+    A regular expression that matches file names, directory names and paths
+    which mypy should ignore while recursively discovering files to check.
+    Use forward slashes on all platforms.
+
+    For more details, see :option:`--exclude <mypy --exclude>`.
+
+    This option may only be set in the global section (``[mypy]``).
+
 .. confval:: namespace_packages
 
     :type: boolean
diff --git a/docs/source/running_mypy.rst b/docs/source/running_mypy.rst
index 3498aaf07275..ad55d3f162f1 100644
--- a/docs/source/running_mypy.rst
+++ b/docs/source/running_mypy.rst
@@ -390,7 +390,8 @@ to modules to type check.
 - Mypy will check all paths provided that correspond to files.
 
 - Mypy will recursively discover and check all files ending in ``.py`` or
-  ``.pyi`` in directory paths provided.
+  ``.pyi`` in directory paths provided, after accounting for
+  :option:`--exclude <mypy --exclude>`.
 
 - For each file to be checked, mypy will attempt to associate the file (e.g.
   ``project/foo/bar/baz.py``) with a fully qualified module name (e.g.
diff --git a/mypy/build.py b/mypy/build.py
index 3050bc3db849..909d793b0002 100644
--- a/mypy/build.py
+++ b/mypy/build.py
@@ -15,7 +15,6 @@
 import gc
 import json
 import os
-import pathlib
 import re
 import stat
 import sys
@@ -2572,6 +2571,7 @@ def log_configuration(manager: BuildManager, sources: List[BuildSource]) -> None
         ("Current Executable", sys.executable),
         ("Cache Dir", manager.options.cache_dir),
         ("Compiled", str(not __file__.endswith(".py"))),
+        ("Exclude", manager.options.exclude),
     ]
 
     for conf_name, conf_value in configuration_vars:
@@ -2771,14 +2771,12 @@ def load_graph(sources: List[BuildSource], manager: BuildManager,
                 "Duplicate module named '%s' (also at '%s')" % (st.id, graph[st.id].xpath),
                 blocker=True,
             )
-            p1 = len(pathlib.PurePath(st.xpath).parents)
-            p2 = len(pathlib.PurePath(graph[st.id].xpath).parents)
-
-            if p1 != p2:
-                manager.errors.report(
-                    -1, -1,
-                    "Are you missing an __init__.py?"
-                )
+            manager.errors.report(
+                -1, -1,
+                "Are you missing an __init__.py? Alternatively, consider using --exclude to "
+                "avoid checking one of them.",
+                severity='note'
+            )
 
             manager.errors.raise_error()
         graph[st.id] = st
diff --git a/mypy/find_sources.py b/mypy/find_sources.py
index 47d686cddcbc..4f50d8ff52b2 100644
--- a/mypy/find_sources.py
+++ b/mypy/find_sources.py
@@ -6,7 +6,7 @@
 from typing import List, Sequence, Set, Tuple, Optional
 from typing_extensions import Final
 
-from mypy.modulefinder import BuildSource, PYTHON_EXTENSIONS, mypy_path
+from mypy.modulefinder import BuildSource, PYTHON_EXTENSIONS, mypy_path, matches_exclude
 from mypy.fscache import FileSystemCache
 from mypy.options import Options
 
@@ -91,6 +91,8 @@ def __init__(self, fscache: FileSystemCache, options: Options) -> None:
         self.fscache = fscache
         self.explicit_package_bases = get_explicit_package_bases(options)
         self.namespace_packages = options.namespace_packages
+        self.exclude = options.exclude
+        self.verbosity = options.verbosity
 
     def is_explicit_package_base(self, path: str) -> bool:
         assert self.explicit_package_bases
@@ -103,10 +105,15 @@ def find_sources_in_dir(self, path: str) -> List[BuildSource]:
         names = sorted(self.fscache.listdir(path), key=keyfunc)
         for name in names:
             # Skip certain names altogether
-            if name == '__pycache__' or name.startswith('.') or name.endswith('~'):
+            if name in ("__pycache__", "site-packages", "node_modules") or name.startswith("."):
                 continue
             subpath = os.path.join(path, name)
 
+            if matches_exclude(
+                subpath, self.exclude, self.fscache, self.verbosity >= 2
+            ):
+                continue
+
             if self.fscache.isdir(subpath):
                 sub_sources = self.find_sources_in_dir(subpath)
                 if sub_sources:
diff --git a/mypy/main.py b/mypy/main.py
index be2fab1bb0f9..d4ee3c190b49 100644
--- a/mypy/main.py
+++ b/mypy/main.py
@@ -808,6 +808,15 @@ def add_invertible_flag(flag: str,
     code_group.add_argument(
         '--explicit-package-bases', action='store_true',
         help="Use current directory and MYPYPATH to determine module names of files passed")
+    code_group.add_argument(
+        "--exclude",
+        metavar="PATTERN",
+        default="",
+        help=(
+            "Regular expression to match file names, directory names or paths which mypy should "
+            "ignore while recursively discovering files to check, e.g. --exclude '/setup\\.py$'"
+        )
+    )
     code_group.add_argument(
         '-m', '--module', action='append', metavar='MODULE',
         default=[],
diff --git a/mypy/modulefinder.py b/mypy/modulefinder.py
index d223058c0367..00a0530e29d5 100644
--- a/mypy/modulefinder.py
+++ b/mypy/modulefinder.py
@@ -7,6 +7,7 @@
 import collections
 import functools
 import os
+import re
 import subprocess
 import sys
 from enum import Enum
@@ -443,10 +444,15 @@ def find_modules_recursive(self, module: str) -> List[BuildSource]:
         names = sorted(self.fscache.listdir(package_path))
         for name in names:
             # Skip certain names altogether
-            if name == '__pycache__' or name.startswith('.') or name.endswith('~'):
+            if name in ("__pycache__", "site-packages", "node_modules") or name.startswith("."):
                 continue
             subpath = os.path.join(package_path, name)
 
+            if self.options and matches_exclude(
+                subpath, self.options.exclude, self.fscache, self.options.verbosity >= 2
+            ):
+                continue
+
             if self.fscache.isdir(subpath):
                 # Only recurse into packages
                 if (self.options and self.options.namespace_packages) or (
@@ -460,13 +466,26 @@ def find_modules_recursive(self, module: str) -> List[BuildSource]:
                 if stem == '__init__':
                     continue
                 if stem not in seen and '.' not in stem and suffix in PYTHON_EXTENSIONS:
-                    # (If we sorted names) we could probably just make the BuildSource ourselves,
-                    # but this ensures compatibility with find_module / the cache
+                    # (If we sorted names by keyfunc) we could probably just make the BuildSource
+                    # ourselves, but this ensures compatibility with find_module / the cache
                     seen.add(stem)
                     sources.extend(self.find_modules_recursive(module + '.' + stem))
         return sources
 
 
+def matches_exclude(subpath: str, exclude: str, fscache: FileSystemCache, verbose: bool) -> bool:
+    if not exclude:
+        return False
+    subpath_str = os.path.abspath(subpath).replace(os.sep, "/")
+    if fscache.isdir(subpath):
+        subpath_str += "/"
+    if re.search(exclude, subpath_str):
+        if verbose:
+            print("TRACE: Excluding {}".format(subpath_str), file=sys.stderr)
+        return True
+    return False
+
+
 def verify_module(fscache: FileSystemCache, id: str, path: str, prefix: str) -> bool:
     """Check that all packages containing id have a __init__ file."""
     if path.endswith(('__init__.py', '__init__.pyi')):
diff --git a/mypy/options.py b/mypy/options.py
index 2a0b3e111442..026046af5da4 100644
--- a/mypy/options.py
+++ b/mypy/options.py
@@ -97,6 +97,8 @@ def __init__(self) -> None:
         # sufficient to determine module names for files. As a possible alternative, add a single
         # top-level __init__.py to your packages.
         self.explicit_package_bases = False
+        # File names, directory names or subpaths to avoid checking
+        self.exclude = ""  # type: str
 
         # disallow_any options
         self.disallow_any_generics = False
diff --git a/mypy/test/test_find_sources.py b/mypy/test/test_find_sources.py
index 5cedec338bbc..056ddf13b108 100644
--- a/mypy/test/test_find_sources.py
+++ b/mypy/test/test_find_sources.py
@@ -1,8 +1,9 @@
 from mypy.modulefinder import BuildSource
 import os
+import pytest
 import unittest
 from typing import List, Optional, Set, Tuple
-from mypy.find_sources import SourceFinder
+from mypy.find_sources import InvalidSourceList, SourceFinder, create_source_list
 from mypy.fscache import FileSystemCache
 from mypy.modulefinder import BuildSource
 from mypy.options import Options
@@ -47,10 +48,17 @@ def crawl(finder: SourceFinder, f: str) -> Tuple[str, str]:
     return module, normalise_path(base_dir)
 
 
-def find_sources(finder: SourceFinder, f: str) -> List[Tuple[str, Optional[str]]]:
+def find_sources_in_dir(finder: SourceFinder, f: str) -> List[Tuple[str, Optional[str]]]:
     return normalise_build_source_list(finder.find_sources_in_dir(os.path.abspath(f)))
 
 
+def find_sources(
+    paths: List[str], options: Options, fscache: FileSystemCache
+) -> List[Tuple[str, Optional[str]]]:
+    paths = [os.path.abspath(p) for p in paths]
+    return normalise_build_source_list(create_source_list(paths, options, fscache))
+
+
 class SourceFinderSuite(unittest.TestCase):
     def test_crawl_no_namespace(self) -> None:
         options = Options()
@@ -172,7 +180,7 @@ def test_crawl_namespace_multi_dir(self) -> None:
         assert crawl(finder, "/a/pkg/a.py") == ("pkg.a", "/a")
         assert crawl(finder, "/b/pkg/b.py") == ("pkg.b", "/b")
 
-    def test_find_sources_no_namespace(self) -> None:
+    def test_find_sources_in_dir_no_namespace(self) -> None:
         options = Options()
         options.namespace_packages = False
 
@@ -184,7 +192,7 @@ def test_find_sources_no_namespace(self) -> None:
             "/pkg/a2/b/f.py",
         }
         finder = SourceFinder(FakeFSCache(files), options)
-        assert find_sources(finder, "/") == [
+        assert find_sources_in_dir(finder, "/") == [
             ("a2", "/pkg"),
             ("e", "/pkg/a1/b/c/d"),
             ("e", "/pkg/a2/b/c/d"),
@@ -192,7 +200,7 @@ def test_find_sources_no_namespace(self) -> None:
             ("f", "/pkg/a2/b"),
         ]
 
-    def test_find_sources_namespace(self) -> None:
+    def test_find_sources_in_dir_namespace(self) -> None:
         options = Options()
         options.namespace_packages = True
 
@@ -204,7 +212,7 @@ def test_find_sources_namespace(self) -> None:
             "/pkg/a2/b/f.py",
         }
         finder = SourceFinder(FakeFSCache(files), options)
-        assert find_sources(finder, "/") == [
+        assert find_sources_in_dir(finder, "/") == [
             ("a2", "/pkg"),
             ("a2.b.c.d.e", "/pkg"),
             ("a2.b.f", "/pkg"),
@@ -212,7 +220,7 @@ def test_find_sources_namespace(self) -> None:
             ("f", "/pkg/a1/b"),
         ]
 
-    def test_find_sources_namespace_explicit_base(self) -> None:
+    def test_find_sources_in_dir_namespace_explicit_base(self) -> None:
         options = Options()
         options.namespace_packages = True
         options.explicit_package_bases = True
@@ -226,7 +234,7 @@ def test_find_sources_namespace_explicit_base(self) -> None:
             "/pkg/a2/b/f.py",
         }
         finder = SourceFinder(FakeFSCache(files), options)
-        assert find_sources(finder, "/") == [
+        assert find_sources_in_dir(finder, "/") == [
             ("pkg.a1.b.c.d.e", "/"),
             ("pkg.a1.b.f", "/"),
             ("pkg.a2", "/"),
@@ -236,7 +244,7 @@ def test_find_sources_namespace_explicit_base(self) -> None:
 
         options.mypy_path = ["/pkg"]
         finder = SourceFinder(FakeFSCache(files), options)
-        assert find_sources(finder, "/") == [
+        assert find_sources_in_dir(finder, "/") == [
             ("a1.b.c.d.e", "/pkg"),
             ("a1.b.f", "/pkg"),
             ("a2", "/pkg"),
@@ -244,11 +252,112 @@ def test_find_sources_namespace_explicit_base(self) -> None:
             ("a2.b.f", "/pkg"),
         ]
 
-    def test_find_sources_namespace_multi_dir(self) -> None:
+    def test_find_sources_in_dir_namespace_multi_dir(self) -> None:
         options = Options()
         options.namespace_packages = True
         options.explicit_package_bases = True
         options.mypy_path = ["/a", "/b"]
 
         finder = SourceFinder(FakeFSCache({"/a/pkg/a.py", "/b/pkg/b.py"}), options)
-        assert find_sources(finder, "/") == [("pkg.a", "/a"), ("pkg.b", "/b")]
+        assert find_sources_in_dir(finder, "/") == [("pkg.a", "/a"), ("pkg.b", "/b")]
+
+    def test_find_sources_exclude(self) -> None:
+        options = Options()
+        options.namespace_packages = True
+
+        # default
+        for excluded_dir in ["site-packages", ".whatever", "node_modules", ".x/.z"]:
+            fscache = FakeFSCache({"/dir/a.py", "/dir/venv/{}/b.py".format(excluded_dir)})
+            assert find_sources(["/"], options, fscache) == [("a", "/dir")]
+            with pytest.raises(InvalidSourceList):
+                find_sources(["/dir/venv/"], options, fscache)
+            assert find_sources(["/dir/venv/{}".format(excluded_dir)], options, fscache) == [
+                ("b", "/dir/venv/{}".format(excluded_dir))
+            ]
+            assert find_sources(["/dir/venv/{}/b.py".format(excluded_dir)], options, fscache) == [
+                ("b", "/dir/venv/{}".format(excluded_dir))
+            ]
+
+        files = {
+            "/pkg/a1/b/c/d/e.py",
+            "/pkg/a1/b/f.py",
+            "/pkg/a2/__init__.py",
+            "/pkg/a2/b/c/d/e.py",
+            "/pkg/a2/b/f.py",
+        }
+
+        # file name
+        options.exclude = r"/f\.py$"
+        fscache = FakeFSCache(files)
+        assert find_sources(["/"], options, fscache) == [
+            ("a2", "/pkg"),
+            ("a2.b.c.d.e", "/pkg"),
+            ("e", "/pkg/a1/b/c/d"),
+        ]
+        assert find_sources(["/pkg/a1/b/f.py"], options, fscache) == [('f', '/pkg/a1/b')]
+        assert find_sources(["/pkg/a2/b/f.py"], options, fscache) == [('a2.b.f', '/pkg')]
+
+        # directory name
+        options.exclude = "/a1/"
+        fscache = FakeFSCache(files)
+        assert find_sources(["/"], options, fscache) == [
+            ("a2", "/pkg"),
+            ("a2.b.c.d.e", "/pkg"),
+            ("a2.b.f", "/pkg"),
+        ]
+        with pytest.raises(InvalidSourceList):
+            find_sources(["/pkg/a1"], options, fscache)
+        with pytest.raises(InvalidSourceList):
+            find_sources(["/pkg/a1/"], options, fscache)
+        with pytest.raises(InvalidSourceList):
+            find_sources(["/pkg/a1/b"], options, fscache)
+
+        options.exclude = "/a1/$"
+        assert find_sources(["/pkg/a1"], options, fscache) == [
+            ('e', '/pkg/a1/b/c/d'), ('f', '/pkg/a1/b')
+        ]
+
+        # paths
+        options.exclude = "/pkg/a1/"
+        fscache = FakeFSCache(files)
+        assert find_sources(["/"], options, fscache) == [
+            ("a2", "/pkg"),
+            ("a2.b.c.d.e", "/pkg"),
+            ("a2.b.f", "/pkg"),
+        ]
+        with pytest.raises(InvalidSourceList):
+            find_sources(["/pkg/a1"], options, fscache)
+
+        options.exclude = "/(a1|a3)/"
+        fscache = FakeFSCache(files)
+        assert find_sources(["/"], options, fscache) == [
+            ("a2", "/pkg"),
+            ("a2.b.c.d.e", "/pkg"),
+            ("a2.b.f", "/pkg"),
+        ]
+
+        options.exclude = "b/c/"
+        fscache = FakeFSCache(files)
+        assert find_sources(["/"], options, fscache) == [
+            ("a2", "/pkg"),
+            ("a2.b.f", "/pkg"),
+            ("f", "/pkg/a1/b"),
+        ]
+
+        # nothing should be ignored as a result of this
+        options.exclude = "|".join((
+            "/pkg/a/", "/2", "/1", "/pk/", "/kg", "/g.py", "/bc", "/xxx/pkg/a2/b/f.py"
+            "xxx/pkg/a2/b/f.py",
+        ))
+        fscache = FakeFSCache(files)
+        assert len(find_sources(["/"], options, fscache)) == len(files)
+
+        files = {
+            "pkg/a1/b/c/d/e.py",
+            "pkg/a1/b/f.py",
+            "pkg/a2/__init__.py",
+            "pkg/a2/b/c/d/e.py",
+            "pkg/a2/b/f.py",
+        }
+        fscache = FakeFSCache(files)
+        assert len(find_sources(["/"], options, fscache)) == len(files)
diff --git a/mypy_self_check.ini b/mypy_self_check.ini
index 2b7ed2b157c5..c974a0248afc 100644
--- a/mypy_self_check.ini
+++ b/mypy_self_check.ini
@@ -19,3 +19,4 @@ pretty = True
 always_false = MYPYC
 plugins = misc/proper_plugin.py
 python_version = 3.5
+exclude = /mypy/typeshed/
diff --git a/test-data/unit/cmdline.test b/test-data/unit/cmdline.test
index c4d20ee78d61..55335a8d1dbe 100644
--- a/test-data/unit/cmdline.test
+++ b/test-data/unit/cmdline.test
@@ -59,7 +59,7 @@ undef
 undef
 [out]
 dir/a.py: error: Duplicate module named 'a' (also at 'dir/subdir/a.py')
-dir/a.py: error: Are you missing an __init__.py?
+dir/a.py: note: Are you missing an __init__.py? Alternatively, consider using --exclude to avoid checking one of them.
 == Return code: 2
 
 [case testCmdlineNonPackageSlash]
@@ -125,19 +125,7 @@ mypy: can't decode file 'a.py': unknown encoding: uft-8
 # type: ignore
 [out]
 two/mod/__init__.py: error: Duplicate module named 'mod' (also at 'one/mod/__init__.py')
-== Return code: 2
-
-[case promptsForgotInit]
-# cmd: mypy a.py one/mod/a.py
-[file one/__init__.py]
-# type: ignore
-[file a.py]
-# type: ignore
-[file one/mod/a.py]
-#type: ignore
-[out]
-one/mod/a.py: error: Duplicate module named 'a' (also at 'a.py')
-one/mod/a.py: error: Are you missing an __init__.py?
+two/mod/__init__.py: note: Are you missing an __init__.py? Alternatively, consider using --exclude to avoid checking one of them.
 == Return code: 2
 
 [case testFlagsFile]