Momo Traders

by Brady Dahl

  Like which ones?

  Well I find it very interesting that everyone seems to be a short seller these days. That’s pretty rare, and it’s a pattern that’s kind of disturbing. If everyone is short selling, eventually the shares are going to run out. There’s a limited supply. And the whole practice lately is a very gray area. Interactive Brokers only finds you a short if it’s

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  available. Other brokers don’t look at it that way. The whole issue of naked shorting gets brought into it. But what I’m saying is, what happens if suddenly those shares aren’t available any longer? I like my method of trading because mine is liquid. It will work regardless of whether or not short selling these micro caps gets weeded out.

  A lot of people are making a lot of money right now on these low float stocks that get so ridiculously over-extended…

  Right. And as a trader I ask myself, is this a good business model?

  Truthfully, it’s not. Where someone else might mimic that approach, I just don’t think it’s a long term strategy. I prefer mine.

  Have you backtested your strategy or is it something you’ve learned over time?

  Again, with the autistic tendencies it’s just something I do over and over and over again. And I’ve made money every year. I think I’ve had two losing months over the last 66 months, so it’s very consistent. I used to be short about 90 percent of the time, but last year I actually made more money going long. With everyone being so short-minded these days, I know now is the time to develop my long game.

  Do you scale into your trades?

  I should. I try to. But I really don’t. Depending on the size of the company, I do a minimum of 25 percent of my portfolio. Like today, CYTR had news in premarket, and I shorted it at $3.75. But the market cap was small so I used 25 percent of my portfolio, shorting around 8K shares. I covered around 9:00 a.m. for $3,200 profit.

  And if it’s a larger cap?

  If it’s something like BABA I have no problem going up to four times my buying power on margin intraday. But I’m such a structured guy, I don’t want to risk as much capital as other traders. I have saved 50

  percent of my after-tax paychecks for the last seven or eight years. I’ve

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  never spent any of it. So I don’t take huge risk like other traders do, but my savings have accumulated significantly over time.

  You don’t leave the capital in your account to put at risk…

  That’s correct. I have $100K in each of my trading accounts and 15

  times that or so in savings accounts.

  Do you add to positions when the trade goes in your favor?

  I rarely ever do.

  Do you average down on a loser?

  Never.

  Good risk management…

  When it comes to risk management I have two fail-safes. One, I always have a stop in mind when I enter a trade. In fact, I’ve never entered a trade without a stop in mind..

  How do you determine a stop if you’re not using charts?

  Usually around whole numbers. So in the CYTR example, $4 was my mental stop.

  And the second failsafe?

  If I’m underwater in a trade by the time the market is set to open, I automatically take the loss.

  Before the open or at the open?

  Usually during that 9:27 to 9:30 a.m. window. Because in my experience, if I’m down in premarket, that stock has a very good chance of continuing to run during the regular session.

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  What’s your favorite setup?

  Shorting an after hours news release the following morning. For example, NERY came out with news last night that sent the stock price from $6 to $12 in after hours trading. I don’t short them in after hours, though. I wait until the next morning. If it opens up premarket near the highs of AH the night before, I short it. Unfortunately this one was such a low float garbage stock with rip-off news that it opened two dollars lower at $10, so I didn’t short it. But it faded all through premarket and then all throughout the day. That’s my bread and butter play. What I should have done with NERV is shorted it anyway at $10 with my stop at $12.

  Are your long trades counter-trend as well?

  Yep, everything’s definitely counter-trend. If it’s a long it’s usually something getting hammered and I’m taking a chance on a bounce.

  I’m not a good breakout buyer.

  How many trades do you typically realize intraday?

  I would say probably two to four trades.

  How many positions do you feel comfortable being in simultaneously?

  One. (laughs) I can sometimes get up to two or three positions, but 90

  percent of the time it’s one.

  Are you usually flat at night?

  Traders like Gregg Sciabica have taught me that a lot of big money is left on the table if you don’t hold overnight, especially on conviction shorts. The trend now and the bigger money is when people have forgotten about the stock and moved on. So the majority of the time I’m flat, but I have been holding more overnight lately.

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  So that’s a recent addition to your trading?

  Yeah, I’ve made two successful additions to my trading lately. One, I go long more often ever since I noticed this trend of everybody getting short. And two, I hold shorts for multiple days to catch the back end of the move when nobody’s talking about the stock anymore. I typically cover half the position the first day, then let the rest ride.

  How long are you letting the rest ride?

  No more than a week. Probably within the three day cover window.

  Do you look at your P&L during a trade?

  I definitely try not to look at it all the time because I think that’s a mistake. If you’re staring at losses daily you’ll try to recover them quickly. It just clouds your mind. But I think it’s easier for me because I could lose all the money in my accounts and still have plenty left over in savings. All I’m concerned with is whether or not I’m making money monthly.

  Do you set a target before entering a trade?

  Never. I always enter a trade thinking I’m going to lose. I want to know where my stop is. I never think about how much I might make.

  So how do you determine your exits on a winning position?

  Usually that’s done by time. If a position is going my way in premarket, I may cover half into that 9:27 to 9:30 a.m. window, and then put my stop at entry for the rest. Let it run throughout the day, maybe even multiple days.

  So you only put that stop at entry if you’ve already covered half ?

  I put that stop at entry whether I’ve taken half or not.

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  If you’re still in a full position and haven’t taken any profits, you’ll let it come all the way back, lose all your gains, and stop at entry? Or do you adjust your stop as the trade goes in your favor?

  Truthfully, that happens a lot because I don’t like to be in front of the computer all day. Although if I’m up five digits, I’m definitely going to start taking some profits. But it also works in my favor because not watching every tick makes it easier for me to allow the stock to fade all day without minimizing my gains by covering prematurely. If they haven’t taken me out by the end of the day and the stock is starting to ramp back up, I’ll just cover it all. But if it’s weak, I’ll probably hold at least half until the next day.

  So you do scale out somewhat…

  Yeah, I will take it in halves. I don’t do thirds or fourths, etc. Either half or all.

  Let winners run by not sweating the intraday movements…

  That’s correct. My win/loss ratio might actually be negative, but so much of that is taking a $100 loss on a $100K trade when I stopped out at entry with a penny slippage. So many of my trades are stop-to-entry, breakeven trades, but they still count as a loss technically. But that’s my method for letting winners run, putting my stop at entry. If I get stopped out, i
t costs me nothing. But if I don’t get stopped out, I can make big money while working out at the gym or volunteering at my son’s school.

  Those must be the best days…

  That’s what my normal days are. I make money 80 to 90 percent of the days. It’s pretty consistent. I definitely could have a more scalable method, or I could pay attention more, but it’s just not my nature.

  Wouldn’t you think it would just benefit me to learn charts?

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  Possibly. But it’s also possible overanalyzing every tick of the chart would make you second-guess the conviction you currently have for a trade…

  That’s how I feel. I’ve never bothered to learn charts because I worry it will take away my consistency. I’m hesitant to change something I believe is working. In fact, I’m just excited I’ve been so successful this past year while making the changes I did make, like going long more and holding shorts for multiple days.

  Do you have a profit goal for each day?

  I used to tell myself a grand per day is a good living, but now I just focus on the monthly goal of making at least $30K. Although coming up short is not a big deal.

  How much does the overall market play into your trading?

  It used to all the time. But so many of my trades are news driven now that the macro doesn’t really come into play. Yet when the market is frothy and speculative and the low float stocks are moving, I will definitely try to long garbage that I would never usually hold. And on the flip side I’m careful shorting them.

  What do you think about trading tips or suggestions for trades on social media?

  I don’t follow anyone into trades. I’m sure I’ve taken a tip from somebody before, but 99 percent of my trades are my own. On the other hand, I think social media is great for new traders because I think the education and access to other traders cuts down on the learning curve. I didn’t have that when I started. That being said, I don’t think social media a year or two down the road will be like it is today. You won’t have this circle jerk of traders promoting their own holdings on Twitter.

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  What do you think it will be instead?

  Much more regulated. There’s just no other way. Right now companies have algorithms that run off the Twitter API and compute trades based on stock symbols and the frequency they’re Tweeted.

  Machines have access to the API, so that needs to be regulated, but also gurus putting their picks out on Twitter, people constantly pumping their own holdings, it’s all going to be regulated.

  You think the SEC can step in and handle that?

  Absolutely. I think they’re already doing it now. They’re learning what type of pumperish activity is misleading investors. Take Twitter pump SPEX for example, a stock that went from $1 to $30 in a week and now it’s back to $1. That type of activity is definitely on the SEC’s radar, without question.

  I always figure free speech will prevail…

  Technically, with the markets, you’re supposed to have a Series 7, although I know there’s legal verbiage you can put on your Twitter page or chat site that says you’re not responsible. But the SEC isn’t going to allow a stock to go from $1 to $30 to $1 within a year without some repercussions. They’re just figuring out how to do it. I’m pretty good at being one step ahead of where the market is going to be, so I definitely see a lot more regulation in social media within the next couple years.

  What’s your biggest win?

  I actually don’t like to talk about my wins. I never focus on them. For karma purposes.

  So what’s your biggest loss then?

  About five years ago I lost over $100K in SPPI. I had just started trading biotechs, and I had longed 20K shares at $7. I thought the

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  FDA panel hearing was coming on Monday, but I didn’t know the committee notes came out a couple days before the hearing. They came out on Friday and that sucker started sinking $6, $5, $4, and I had no idea what was going on. I ended up selling around $2. That was a huge learning experience for me. I’m a date trader. I trade by time and catalyst, so learning the FDA process and how to trade biotechs around those dates has made me more money over time than I actually lost on SPPI.

  Were you playing the run up into Monday?

  I actually planned to sell intraday, but it was my own ignorance that got me. I’m very careful with biotechs ever since that trade. I still remember it because John Ashcroft, who is still an analyst at Brean Murray, said it was going to be approved. I even talked to him via email about his opinion beforehand. After SPPI tanked I sent him a nasty email telling him how bad he sucked. So I didn’t take full responsibility for the loss, (laughs)

  But you learned from it…

  Oh yeah, that’s why it comes naturally for me to talk about my losers.

  Every bad trade gives me the learning experience necessary for my winning trades.

  What percentage of your account was lost?

  Well it was 25 percent of my gains for the year. But to lose it just because I didn’t know the notes were coming out is pretty pathetic if you think about it.

  How do you handle losses or losing streaks in general?

  Losses don’t bother me at all when I follow my rules. If I have bad losing streaks it s usually because I haven’t been following my rules, but I handle it by getting away from the computer and taking a day off.

  Sometimes you run bad. It happens. I just had a week where I lost

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  Monday, Tuesday, Wednesday, and Thursday, so I took a three-day weekend and came back Monday with a clear head and started printing money again. People think they need to make their money back right away, but that’s just not the case. You need the time away. But it’s actually rare for me to have back-to-back losing days.

  Yeah, you mentioned you’ve only had two red months in the last 66 months…

  And one of those months I was on vacation. I only traded one week that month and lost $5K, so it’s insignificant and immaterial. But the other month I got absolutely destroyed. It was when the market started to turn around in 2010 and I kept trading SKF. I stuck with it day after day, losing $2K or $3K each day. After about three weeks, down like $70K, I finally decided the strategy was no longer working.

  The market had changed…

  Yes, and I didn’t pick up on the change and stuck with my strategy of shorting ETFs too long. It had worked well for two years, so it took me awhile to realized the change. But my philosophy is the problem isn’t being wrong, it’s staying wrong, so I adjusted, and since then I haven’t had a losing month in five years, besides that one $5K.

  What’s your biggest disappointment when it comes to trading?

  I love my job. I love what I do. But I can’t really talk to many people about trading. It’s a lonely gig. At least it is for me.

  But you still wouldn’t wish to do something else…

  No, this is what I was meant to do.

  What’s your proudest moment?

  Paying off my mortgage. I hate debt. Although with interest rates below 4 percent it’s actually not horrible, (laughs)

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  What would you consider a defining moment or turning point in your trading career?

  My defining moment was when I first invested in AOL. (laughs) Because I had never thought about the market before then. And I don’t think I’ve had a turning point really because month to month I’ve been very consistent ever since. My accounts just keep going up.

  I don’t suppose you’ve ever thought about giving up trading along the way…

  Truthfully, I think about it all the time. Especially after a bad trading dav. I think about what it would be like to have a normal job, and then I laugh because I would never want one. It always comes back to knowing that this is what I want to do.

  Do you ever worry about becoming unprofitable?

  No. But trading is stressful, so what I worry about is whether or
not I need to continue to risk income. I have savings, so should I get a steadier stream of income without trading? Maybe. But I keep trading because the profits have always been so consistent.

  Do you think trading is an innate skill or can it be learned?

  My type of trading is innate, unfortunately. I loved math as a kid. I have an accounting degree and an MBA in finance. My brain is just geared to think about numbers, balances, P&Ls, and cash flow. I’m definitely not your typical Twitter trader. I actually understand filings.

  So do you often do that research on the trades you’re in?

  No. (laughs) But once I’m in a trade I will do a little bit of research sometimes. But with my strategy I don’t have to think much.

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  You basically trade on the psychology of other traders…

  Sentiment. Although some trades do come up on the balance sheet, like realizing a certain company might be raising money soon based on the news that just came out, but I rarely ever crunch P/E ratios or competitor’s statistics. I can, but I’m too lazy.

  Can you give an example?

  Say a biotech comes out with some sort of positive news and I’m already familiar with the company and know their drug is still in early phases of development.. I have no problem shorting that stock before researching anything besides reading the news. Then when I go research and find out it has a higher debt load, I’m more likely to stay with that position for multiple days.

  Thinking a raise might be coming…

  Yeah, that’s my thought. I love biotech because you can place whatever value you want on a stock until it gets FDA approval. It’s all about sentiment. Plus, there’s crazy volatility. Just yesterday I banked $30K on a biotech that went up 50 percent. Then today KBIO got halted and I lost $20K right back, (laughs) At least I net $10K.

  What are your shortcomings as a trader?

  I definitely think too much in a box. I’m so structured via time. I could also scale into trades better than I currently do. Like with the CYTR

  short—I knew it was going to pull back on that news, so instead of taking the minimum 25 percent of full position, I should have gone larger. I should have doubled the $3,500 profit I made, but I didn’t want to take the additional risk.