by Brady Dahl
Were you ever able to answer the question of why you’re still risking the millions?
Well, it was a tremendous struggle. One of those monumental moments in life. Mow do you process it? It’s like a divorce or a career change. I really struggled with it. I scaled way back and had to do some self-assessment and confidence building. Am 1 still capable of trading?
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Was this just luck all along? Was the risk of losing on a big one higher than I thought all along?
Effectively meaning your strategy is worthless. The outlier is bigger than you thought…
Yes. I really grappled with it. I very seriously thought about quitting And when you experience something in life that’s so psychologically traumatic, you don’t associate good feeling with it. It’s hard after something like that to say, “I like trading.” I have mixed feelings about it. A lot of your self-definition is based on what you do in life, and if you’re no longer successful at that thing, it’s almost like your entire definition of who you are is…
... called into question.
Yes, on so many levels. Now I’m calling into question all the things I’ve known about trading, so maybe I need to find a new strategy. In fact, moments like this would motivate me to research even more. I had already been interested in futures trading for a couple years, and this experience really gave me the kick in the pants to look into that more deeply. Systems trading in futures is actually very popular, and I was always into systems. Shorty after that is when I launched a commodities fund because I was looking for ways to diversify since I wasn’t really sure if I was cut out for day trading anymore.
Did you think commodities would be less stressful because the system would handle itself and basically just print money?
Yes. For many years I was always in pursuit of the right system, the holy grail of trading. I really pursued it with a lot of passion. I believed if there was a formula out there, it could be cracked. And it’s not a matter of “if ’ but a matter of how much effort it’s going to take. If I’m more determined than the next guy, I’ll do it. Like an athlete, if I train harder, I’ll win. That was the mentality I had as I spent years testing systems and looking for new ideas.
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How did the fund do?
We actually got off to a great start. I still spent a lot of time trading stocks and wondering if it was right for me, but I think perhaps the distraction of having another project that was successful helped carry me through. The fund made money right from the beginning. It’s a long story, but when oil prices peaked all the commodities hit a bubble at the same time. Once the bubble popped volatility went to nothing and our fund just kind of churned. There were several reasons why but after three years we pulled the plug.
Meanwhile you were trying to push through your biggest drawdown to date day trading...
Yes, I just kept plugging along, and my performance the next year, in 2007, was decent. It was by no means spectacular, but my expectations were much lower. I was still just trying to prove to myself that I could do it. I was researching ideas, working on systems, trying to figure out how I could implement all the different strategies I had used over the years, but with lower risk. I would say the turning point in this process, the “aha” moment, came late in the summer of 2007. It was a slow day, so I was taking care of things around the house and had my laptop in the kitchen just to keep an eye on it. The mortgage stocks had already had a horrendous drop, and something popped up on
briefing.com regarding the sector. I don’t remember what it was exactly, but it listed like five or six related stock symbols. All I did was glance at it and say, “Oh, that’s a buy.” And I walked away. Then a few hours later I came back and those stocks had jumped like 15 or 25
percent. Huge moves. And something clicked in me. I wasn’t the kind of trader to look at something and just call it a buy or sell, that’s not something I would normally do. But I just knew. On a sector I didn’t even follow that much. After eight years of trading, I suddenly realized I now had enough experience to actually have an intuition related to fading that actually meant something. That’s when it clicked for me.
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Your defining moment in trading happened when you weren’t even trading...
Yes. That was a big turning point in my confidence because I realized it was no longer just looking at patterns, it was no longer just technical analysis, and it was no longer developing a system. . I was part of the system, my ability to interpret stocks. This was the very first step in the evolution of becoming what I like to call, an event-driven analyst. The trading world always talks about technical analysis versus fundamental analysis, but when looking at short squeezes, margin calls, promotions and stuff we trade, neither of those definitions fit. I’d like to introduce a new term like catalyst analysis, something that’s more focused on event-driven trades. In fact, had I applied the event-driven analysis to FMXIQ a year prior, I may have avoided that disaster completely.
Unfortunately, by basing the trade purely off the chart, I didn’t realize that certain chart patterns need to be interpreted differently based on why they’re moving. Under certain circumstances the chart pattern I was looking at was a five-star, once-in-a-lifetime opportunity, but under its actual circumstances it wasn’t. Chart patterns cannot be looked at in a vacuum. It can be interpreted different ways depending on the context of the catalyst, the market environment, and all these different factors…
It speaks to the story of the trade we’ve discussed, the 30 things you have to take into account...
Yes, this “aha” moment was the birth of that, the start of my greater understanding of trading. Up to that point I was looking for the holy grail of mechanical systems, but now I believe the human mind is a better trader than a computer. The human mind can take into account far more variables and process far more information than any computer. My transformation was realizing that I could be the system.
I understand all the patterns and now can pull in all these other variables that are so difficult to program into a computer. In a way it’s a more advanced system where I rely far more on intuition. The backtesting is a mental library of patterns and information. When I see this pattern in this type of environment with this context and this catalyst, the stock typically moves X percentage over the next day or
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two. It becomes far more abstract and elusive as far as trying to define these things in a quantitative fashion, but it’s still there at some level.
After years of experience, intuition now plays a big role in your trading...
I think a lot of technical analysis and chart reading is an art. And because I think it’s an art form, I feel like I’m indirectly saying trading is intuition. But that doesn’t mean it can’t be taught. Anybody that’s good at anything still has an enormous amount of training and education to get to that point. But chicken and the egg, right? As a youth I spent an inordinate amount of time playing with statistics, so obviously I had some inclination towards trading, and yet I still built it up through time and practice, so it kind of goes both ways.
Developing as a human being is similar to the way we’ve been discussing how a trade setup develops. There are so many variables involved, all combining to create the person or trade present before us today.
Yes. And I firmly believe that anyone who is good at anything would similarly find all kinds of things speckled throughout their life that contributed to that success. Whether or not genetics play a part of it, it’s nearly impossible to find someone at the top of their game who did not have an enormous amount of training leading up to that point.
Society loves to hold these prodigies up and say, “Oh, they’re just naturally gifted.” We love to do that. But when we pull back the hood and look underneath, it’s not the truth.
So how did your trading change after you realized you are the system...
2007 continued to get a little better. I s
tarted to trust more and more in my intuition and pay more attention to actual news. I subscribed to more news feeds, realizing this information could a) have prevented my near blowup, and b) open doors to new opportunities. But it was still a process. It’s not like I started hitting home runs immediately. But
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I was building confidence. By the fall of 2008, I was really firing on all cylinders with this new event-driven analysis, and it was perfect timing The financial crisis and crash provided all these different events to trade off of. I remember nailing a six-figure profit in one day, which was monumental for me because it proved that it was possible and that perhaps I could be good at it. But by January of 2009, I had to take some time off, which is something I had previously never done. I always drove myself to work very hard. I was always afraid of missing an opportunity, but the stress and pressure was really adding up. I needed to really just turn it off and walk away for a true mental vacation.
And that was a crazy time to do it…
Yes, I was fully aware that it wasn’t a good time to walk away from trading, but sometimes you get to that point where you just know what you need I was finally trading well again, I had a good year in 2008, topping a million in profits again finally after a few years, but I had to pull it together and kind of strike some balance in my life. The idea in my mind was once I felt better, I’d return to trading. During the time off, I would think to myself, do you want to go back to trading soon?
And the answer was always no. I don’t know if it’s a coincidence or not, but the process took nine months, before I finally returned to trading in the fall of 2009.
So you gave birth to your resurrection?
(laughs) Yes, it felt like a rebirth. On vacation I had listened to Tim Sykes’ audio book, An American Hedge Fund, because the description looked interesting. I had no idea who he was, and that was my introduction to him. But hearing someone else talk about trading made me feel more inspired and motivated. When I returned to trading I really felt like my trades were clean and solid. I was avoiding errors and nailing executions. What 1 had tried to do in 2006, ramping it up and elevating my game, is what finally happened in 2009. It was still a process, but the profits kept going up and up. My performance was brought to a new level, trading more setups than ever before,
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understanding the catalysts and information far better than ever before, and really transforming this purely technical based trading to—
no better way to describe it—an art form. I finally gave up on the holy grail system and began to trust in myself as a trader.
And your P&L from 2009 until now reflects that trust…
Definitely. I topped $5 million in annual profits each of the last two years. And remember, in 2006, the goal was only $3 million.
Took a few more years than you thought, but you surpassed it…
Well it also took a different approach. I had to finally accept the fact that I couldn’t just self-improve to do it. Just reading books and willing it to happen was not going to work. I had to embrace the whole process of improvement and realize I needed balance in life to avoid burnout, especially as I get older with a family and more responsibilities. I love the reputation of being the hard worker who’s always trading the markets, but learning how to shut that off was a lesson. Taking a step back from trading in 2009 really completed the whole transformation process. Ever since then I have taken true, tum-everything-off vacations in the summer. Usually for two or three months. Even if I love trading, I need to do other things in life. I can’t just be a trader. I need to be a father. I need to be a husband. I need to have other interests.
I’ve had this conversation with my wife…
You’re allowed to pursue your own self interests, if you want to call it that, but I think the key is balance. I don’t want to be like these famous entrepreneur guys who get loads of respect in public but then we learn about how they’re strangers to their family because they were never there. I don’t want to be that guy. I love the idea of accomplishing something big, important, meaningful to the world and to yourself, making your imprint on society in some way, but I don’t think you should do it at the expense of everything else.
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What’s your proudest moment in trading?
I think it’s the start I had. The ability to trade well in 1999. I took a $25K account and made over $700K in my first year.
Not too shabby.
It just never occurred to me to think the way I see a lot of traders start today, where they want to make a set amount per day. My approach was always a system where you compound profits. If the system has the potential to make $2 million but I make only $700K, there should be some disappointment there. Not to say I’m disconnected from reality and not happy with that kind of money, but…
...if it was simply a game and you were supposed to make 2
million points but only made 700K, you’d be disappointed.
Yes.
It’s difficult for people to conceptualize that in terms of dollars because we attach so much baggage to money...
For years and years I had few reference points in my life for what a trader should earn. Traders in books I had read made hundreds of millions of dollars or at least tens of millions. Another guy I met before I started trading claimed to make $10K a day from day trading.
My perception of what a trader should earn was very high. But when Tim Sykes launched Profitly in 2009 or 2010, it was a real awakening for me because I used to think all these other people were making so much more than me. I didn’t realize even $2 million a year would put me at number one. I never would have guessed that. That being said, I’m not naive to the point that I don’t think there are other traders better than me. I’m positive they are out there. But as far as this community, I never would have expected to hit the number one spot.
The reason I bring this up is because I think expectations can have a huge impact on how well you do trading. Someone who thinks a good trader makes tens of million dollars a year is less likely to struggle with
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the concept of increasing size, because his expectations are already set that high. $10K a day is $2.5 million a year and that was my expectation when I started. That was my idea of what a day trader should make, but I wasn’t making that, so in my mind I was nothing special. Don’t get me wrong, I knew it was good money. I’ve worked in the real world where $50K a year was good money. But for the profession, it’s kind of like going into the NFL where the average quarterback is earning $10 million a year, but I sign for $700K. That’s awesome money, but I’m going to be bummed.
What advice would you give traders who want to increase size?
If I can already make $1K on a trade, theoretically I should be able to trade double the size and make $2K. If I can make $10K, I should be able to make $20K. But we all have those mental feelings where it’s really hard to push past a certain size because we become uncomfortable. It might be when the dollar amount represents a week’s salary, or a year’s, or the value of a car, but there’s something about it where it becomes nerve-wracking on a different level. The best way I know for a trader to push past that is to stop defining success compared to the real world. Think of it in terms of trading.
Think of it as poker chips…
Yes, the more you can stop thinking of it as money, the better. Think of it as a game or sport. If your P&L were literally points and not dollars, you wouldn’t have nearly the same mental hang-ups. In trading, the objective is to score the most points possible. And yet we have trouble because those points translate into real dollars which buy things and sell things and pay the bills.
After the phenomenal run you’ve had since 2009, do you still worry about blowing up?
I’m no longer worried about blowing up, but I still sometimes have moments of low confidence, (laughs) If you ask me how much money I expect to make from now until the end of the year, my g
ut feeling is
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zero. That’s the absolute truth. I’m not exaggerating to make a point.
It’s just a gut feeling. I can’t make a rational, logical argument that it’s true, but I’m telling you in my subconscious mind the answer is zero.
That’s my insecurity, the same insecurity that drove me for years and years to figure out the next pattern.
What’s something new traders should know?
I feel like one of the biggest, most important concepts to understand as a trader is that we don’t get paid for working. This is one of the few jobs in the world where we can show up, work 10 hours and make nothing, or even worse, lose money. We don’t get paid for sitting in front of the screen, no matter how long we do it. We get paid by waiting for opportunities and then capitalizing on them. A trader is opportunity driven. And no matter how hard we work, we cannot create an opportunity. Working harder will not make an opportunity appear. It’s either there to be found or it doesn’t exist. We all have this mentality that we want to get paid, but trading when there is no good opportunity is a great way to lose money. I see newer traders doing this all the time.
So be selective. That’s great advice for traders, new and old…
Be selective, and only trade when you have an edge. If you don’t have a tested, proven edge, and you’re just throwing money at stocks, you have to wait until you have a strategy. People come into the market and think they can buy breakouts and make money because they read it in a book, but what makes them think it’s going to work? If you don’t have a positive expectancy to your trading, you are not going to make money. You need to have a proven strategy.