by Brady Dahl
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you’re going to lose it all. I can tell you if a trader is going to be good or not based upon his personality, not his intelligence. My friends who are successful traders are disciplined and calm. They can get pissed sure, but they don’t let it affect their trading.
Some people say trading should be robotic. “Disciplined” and
“calm” seem to point in that direction…
I was a robot. And it has to be reflex. You have to get to the point where you don’t think, you just react. The market moves too quickly for you to second-guess yourself. I compare it to being an athlete.
They don’t think. They react. Once trading becomes instinctual, all confidence problems are solved. You just act.
What are you doing to make yourself a better Nasdaq trader?
I force myself to sit all day and concentrate. I don’t rely upon past success. I treat it like I’m starting from scratch with no bankroll—like I need the money. Each day is a new day. Doesn’t matter if you’re up already this week, what have you done today? Pay yourself every day.
What do you think other traders do better than you?
They have more patience. I have no patience. I take the profits, and then I cry about it when I miss out. (laughs) What do you think you do very well?
I’m very good at picking entries. When I post something publicly to Twitter I’m pretty dead on. My timing is also good in terms of spotting tops and bottoms. Simple charting.
Do you have any trading rules that you live by?
Don’t fight the trend. Cut your losses. Don’t add to losers. Remember you are not smarter than the market. The market doesn’t give a damn what you think. If you can do all those things, life will be easy.
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Do you still worry about going broke?
No. The only reason you would worry about going broke is if you’re gambling. It’s like Rounders, “you can’t lose what you don’t put in.” If you’re not putting your entire bankroll into a trade, then you don’t have to worry about going broke. The only fear I have is not being able to make the same amount of income I used to. And that fear can lead to further losses because you become impatient to get back to where you once were. Once you get a taste for the good life, it’s very difficult to go back. So you have to save your money all the time. I’m not going to buy a Ferrari every month like I used to. (laughs) After trading so long, what do you think when you look back?
I’ve been doing this for a long time, and up until recently, it was always about the challenge, the quest to succeed and become the best at something. In my opinion I became one of the best penny stock traders, hitting many goals along they way, including the bucket list, seven-figure trade. But the problem is I committed so much time and energy it destroyed my personal life. When I became successful at work, I became a nightmare at home. I never took a vacation. I did a three-year stretch where I never took a day off. If I took a vacation, I had laptops set up in the hotel room. I was trading on my laptop as my kid was being bom. I was driven to become the best at all costs. Now that I’m older, I’m focusing more on enjoying life. Having more money or more toys isn’t really going to do anything for me. You have to find balance somehow.
So where do you see yourself in five to 10 years?
Still trading. Enjoying life. And not having to compete. I’ve always thought of trading as a videogame, where I was trying to get the high score, competing with others but mainly with myself. And then I thought I got the high score with the FNMA trade. But the high was short-lived because you can never really get the highest score. Trading ls a video game with no ending. You have to find a life outside the
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computer. You have to find enjoyment outside the numbers because if you get caught up in the money, it will change you.
It’s more about the journey, the fulfillment of goals…
Correct. It sounds like bullshit, but it’s true. When you get to that level, what’s another S100K? Nothing. So you have to find motivation outside of money, like trying to accomplish something that hasn’t been done before or trying to go on winning streaks of months at a time.
So how do you define success?
For me, it’s having the respect of my peers. I think if you have the respect of your peers, especially the top people in your field, you know you did something right. And throughout it all, I’ve had integrity and lived by my principles. I always wanted to be more than normal. I wanted to do something that had never been done before or at least something that very few had done before. And with penny stocks, I feel like I did that. I started out as a kid with a goal of making $100K
per year, and there have been times where I’ve made hundreds of thousands in a matter of minutes. I did something that I never thought possible, and I did it honorably, admirably, and with integrity. Sinatra said it best: “I did it my way!”
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The Tape Reader
“I always enter a trade thinking I’m going to lose.”
John Welsh (@johnwelshtrades) is a 41-year-old trader from Connecticut who once funded his trading account with cash his employer gave him to pay for his MBA.
Raised in a middle-class neighborhood in Norwalk by divorced parents, he didn’t really know the market even existed until college.
But he loved math, especially algebra, and with self-declared “autistic type” qualities, he eventually earned a degree in accounting and a master’s in finance.
He trades without the use of charts, Level II, or multiple monitors, calls his two brothers “dicks” (”You can print that!”), and blocks Twitter followers at the drop of a hat, including this author for a period of time. But it’s this no-nonsense attitude that has served him well in the stock market over the past 16 years, allowing him to see companies for what they truly are.
I hear the money you used to begin trading was obtained in an interesting way…
After I got an accounting degree in college, I got a job with a corporation that wanted to pay for me to go back to school and earn
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my MBA in finance. They wrote the checks out to me personally, and it was my obligation to pay for school with that money, but I didn’t.
Instead, I took out student loans to pay for school and used the corporation’s money as my capital for the market.
How much capital?
Around $100K over the course of the four-year MBA program. No one was going to give a kid coming out of college $25K to trade, so that’s how I acquired my capital to do it. It was risky and not something I’d do today, but I wanted to try to leverage the tech market and how insane it was then. It turns out I just happened to be investing at the right time. I actually had no idea what I was doing.
What did you invest in?
I was very intrigued by the Internet, dial up access, and how you could connect anywhere in the world, so I invested pretty heavily in AOL. If you look at the chart between 1998 and 1999, when I held it, the stock split five or six times. It was literally my only holding. Whenever I got money for my MBA, I’d buy more AOL. While I was working I would be watching the AOL ticker, fixated on it for nearly two years. Not only did I make back the J100K in student loans I took out, but I made enough to pay my taxes and have some left over to continue investing. I was instantly hooked on the market, even though it was a blind investment that I got very lucky on.
Did you continue working for that corporation?
After they paid me my last MBA check, I cashed it, waited until it cleared, and then put in my resignation.
To become a full-time trader?
I still wasn’t a full-time trader because I took a job at Priceline, which had just gone public, I wanted to trade fulll-time, but I got such a huge
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raise to go there I just couldn’t turn it down. I decided going it alone trading was too risky at that point without enough capital.
When did you evol
ve from an investor into a trader?
In 2000 and 2001 when the market started to tank and I started to lose a little bit of money in my investments. I decided I needed to pay attention because putting money into the market and not paying attention just wasn’t working anymore, (laughs) The market was going down and I started learning how to short sell.
How actively were you trading then?
Not very. Maybe twice a month because I was still working at Priceline. But I don’t like the corporate structure. Within the three years I was at Priceline, I was promoted five or six times, so it was going well, but I always clashed with management. I didn’t agree with everything they said, and they didn’t like that I wasn’t a “Yes” man.
During my last year there I started an online business.
What was that?
TheConsumerBridge.com, which was a beautiful business model that can’t exist today. I was re-selling cell phones on Google for five cents per click when people accidently searched for typos, like “cel phone,”
or when people misaligned their fingers on a keyboard’s home row and typed in what they thought was “cell phone.” That’s where I made the majority of my money and was finally able to quit at Priceline, even though I knew that business was only a one or two year deal before Google would find their error. Eventually they’d figure out people are actually trying to search for the real term and fix the algorithm.
So your intention was to do that for a couple of years before trading full-time?
My intention was to save every dollar I made before Google finally figured it out and wanted to be paid more for those clicks. And that’s
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what happened. They found and fixed it within about 15 months.
TheConsumerBridge.com did about $500PC in revenues the first year, half of that the second year, and then not even 10 percent of that the third year. But I was able to put away about $250K from that little blip in the Google algorithm. It gave me the capital I needed to quit my job and cushion my start as a full-time trader.
So you started trading with over $200K?
I started with S100K.
How did that first year of full-time trading go?
I had developed a knack for short selling already, and when TheConsumerBridge.com wound down it happened to be 2008/2009
when the market got absolutely destroyed. So once again it was just good timing. I started trading very actively, especially the ETFs.
How did you become so proficient at short selling?
When the market corrected in 2000 and 2001 after the tech bubble, the one thing I noticed about myself is that I was a good reactive trader as opposed to a proactive one. Tm much more comfortable shorting a company on a parabolic move than I am predicting a parabolic move, especially if I know the company well.
And the setups you saw in 2000 were setting up again in 2008?
Yeah, I saw those patterns and noticed people tend to flock to things that are moving. They also tend to overshoot. That’s why I got into short selling more, because to me it was easier money. I had this short-seller mindset heading into 2008 to the market action was right in my wheelhouse. I made the most money on SKF, a double short financial leveraged ETF of all the banks. Actually, one of the reasons guys like Jim Cramer and Doug Kass were claiming that the banks were going bankrupt was because of the wonky things this ETF was doing. It was
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the right instrument at the right time for me. That first year I made between $400K and $500K in profits.
And the next few years? Did the success continue? Did you have any down years?
Knock on wood, I’ve never had a down year. 2008, 2009, and 2010 are the best years I’ve had in the market, but I’d say I average about $400K a year usually. I’ve done less some years, but I also have consulting income where I advise a couple hedge funds.
What’s your daily routine while trading?
My routine is about as structured as they come. I wouldn’t say I’m a diagnosed autistic, but I definitely have autistic type qualities, which is great for trading I think. I get up at 7 a.m. every day and fire up my software. I immediately look for news items, preferring the 7:00, 7:30, and 8:00 a.m. news. I trade until about 10:30 a.m., depending on the day, and then go to the gym for an hour or so. I do most of my trading before noon with very little trading after 2 p.m.
Are you in open positions when you head to the gym?
It depends on if they’re working or not. If they’re not working, I can’t go to the gym. And that’s a bad day.
And you come back and close most of them out before noon?
No, if my positions are working, I can keep them all day. And if I like the action, I will keep them on overnight. But I’m very structured in the fact that I will not open a new position after 2 p.m. unless there’s special circumstances surrounding it.
Do you trade after hours?
I watch the market after hours, but I rarely trade. I usually shut it down around 4:30 p.m.
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Do you keep a trading journal?
Yep, 1 have an Excel spreadsheet that 1 record every trade in. Not really to keep track of the dollar amounts, but to identify patterns problems, or things I could be doing better. For instance, I’ll look at my position sizes over the course of that week and compare those sizes to the time of day the trade was made, because I like to be more aggressive in the early morning, around 8:00 to 9:00 a.m., and less aggressive as the day goes on. Stuff like that.
Do you perform a scan at night?
No, I never do. I have a watch list, but I don’t do any scans. I’ll look to see what stocks are setting up between 2:00 and 4:00 p.m. and put those on my watchlist for the next day. I’m not trading at the end of the day I’m looking for stocks that are setting up for tomorrow.
I Do you come back to the market at night?
Nope. With kids it’s definitely shut off until the next day.
What’s on your trading desk? What tools do you use?
I’m probably the most different trader you’ll interview when it comes to this, but I don’t use Level II, charts, or multiple monitors. I have one monitor. I use E*Trade, TD Ameritrade, Interactive Brokers, and then Centerpoint Securities for hard-to-borrow shorts. But there’s no mobile platform for Centerpoint, and I can’t stay in front of a screen all day – I want to go to the gym—so I don’t use them as much. I also have TradeTheNews.com up and Twitter.
No Level II, no charts…
Nope. People can't believe that fact, but it’s true. I feel like I’m a tape reader. 1 think 1 m better off seeing where a stock is moving, rather than where it was. 1 see whether the price is moving up or down, and I stick to my time frames for the trade.
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How do you pick your trades then without technical analysis?
My big strength is processing large cap news very quickly, so I tend to get in and out before people can even think about what to do. It's hard to teach, which is why I don’t have a paid chat room or anything like that. Well, that and the fact I don’t want to deal with all the headaches.
What do you mean by timeframes?
At Interactive Brokers you can trade at 4:30 a.m., before anyone else.
And people still don’t understand how significant that advantage is over a platform that doesn’t offer that capability. If I gave you the option to long or sell something before anyone else, wouldn’t you say that’s a significant competitive advantage? Because a lot of people aren’t awake for premarket. A lot of people just see the news later than me. And since I’m able to process news quickly, it works in my favor.
Do you make most of your trades premarket?
A large percentage between 8:00 a.m. and 8:30 a.m., yeah. I definitely make more than 50 percent of my profits in the premarket, which I think is rare for traders.
A lot of people don’t like the low levels of liquidity that early in the morning…
; Right, from 4:30 to 8:00 a.m. there’s not much liquidity at all, but from 8:00 to 9:30 a.m., believe it or not, there is. And that’s my favorite time frame. That’s when I like to enter trades. And if they’re still working for me when the market opens, I’m likely to keep them on. Otherwise I’ll cover the trade just a couple minutes before the open.
Is that to avoid the volatility of the open?
I do it because all the stops and limit orders from the prior days still need to be processed. If a stock is up 50 percent on news that morning, there are a lot of orders that are waiting to be filled that can’t
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be executed in the premarket. So market makers need to start adjusting for those orders between 9:27 and 9:30 a.m. I’ve made a lot of money during that three-minute time period when the stock pulls back, especially if the news isn’t as good as everyone thinks.
Can you give an example?
Let’s say a stock closed at S10 yesterday but has news today and is set to open at SIS. A lot of people who are at work and haven’t even seen the news still might have limit sell orders in from $10 all the way to $15. The market maker won’t bring it all the way down to $11 to fill someone’s sell order, but that order basically turns into a market sell.
That’s when a little air pocket comes into play. It looks like people are actually trying to get out of the stock when they’re really not. And the thicker the stock with the bigger the market cap, the better it works.
There just aren’t enough orders waiting to be filled on the thinner stocks…
Right. Not a lot of shares, not a lot of orders. But if the market cap is above $1 billion, it 100 percent applies.
And you take advantage of that…
All the time. In fact, if I just stuck to that type of trade, I wouldn’t say I’d have more money, but I’d say I’d have less stress. They’re pretty much guaranteed trades, because I don’t think there’s any way for the market to “fix” that occurrence. In my opinion, that’s a strategy that isn’t going to eventually fail like some other ones we see lately.