Momo Traders

by Brady Dahl

  How do you define success in trading? In life?

  I think it’s important not to judge the success of an individual trade on the profit and loss, but on whether or not I traded it properly. It] is possible to trade something well and still lose money. If I have a setup that has an 80 percent chance of success when traded perfectly, 20

  37 The Storyteller

  percent of the time I’m going to lose money on it, and yet I still made the right trade. And vice versa it’s possible to make money on a trade that, if done over and over, I’d lose 80 percent of the time. I also need to maximize my opportunities to be a successful trader. If I had the opportunity to make $1K on a trade but I end up taking a $250 profit because it felt good or I just wanted to lock some up, that might be well and fine, but I wouldn’t call that a successful trade. If I’m not maximizing opportunities, it’s going to be a lot more difficult to overcome the losses and the bad days. So it’s necessary to judge trading success much more critically than just whether or not I’m making money. Long term success in trading really should be measured more on the level of success as a person. I think sometimes traders can lose focus on the fact that there’s far more to life than just how much money you’re making. If someone were to ask me, “Would you rather be rich and miserable or poor and happy? —I don’t know about you, but any day of the week I’d rather be poor and happy. To me happiness is far more important by many magnitudes than wealth.

  Sure, it’s true that wealth can help you attain happiness. Studies have even shown that, to a point, money does help you achieve happiness, but the interesting thing is that above a certain threshold, around $75K

  a year, it doesn’t contribute to happiness at all.

  The benefit becomes marginal…

  Yes, it plateaus. Because at that point you have all your major concerns taken care of. So I think success as a trader needs to be thought of in terms of success as a person. Am I enjoying my process as a trader?

  Am I enjoying my life outside of trading? If I’m consumed by researching and sitting indoors in front of a computer screen for 12

  hours a day, I might not be enjoying my life very much, even if I’m making a lot of money. There comes a point where I no longer call that success. I’ve struggled with that kind of balance, but I’m aware of it and working on those aspects of my life. I will tell you for a fact—

  and it’s always easy to say when you’re the one who has it—but I’m not happier today with more money than I was three years ago with less. Zero improvement in happiness. That doesn’t mean there isn’t fulfillment in achieving big things in life. Making a million dollars is a

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  tangible goal which may bring a feeling of fulfillment, but it s not the ownership of the actual cash that brings you happiness.

  It’s the journey and the satisfaction in achieving your goals...

  Yes, it’s the process. Very much like a sports team winning a championship.

  Who cares about the trophy...

  Right. It’s about the process of getting there and the accomplishment, fulfillment, and memories it brings.

  Dare I say... it’s about the story?

  Sure, you could say that.

  39 The Gambler

  The Gambler

  “I have the idea that every trade is going to pay me forever.”

  Eric Wood (@elkwood66) is a 48-year-old trader born and raised in northeastern Florida who didn’t place his first trade until he was in his 30s.

  His mother was a school teacher and his father a bar owner, which he says combined for a very middle-class upbringing. But his father was also a bookmaker, perpetually chasing a fast and easy buck, a pursuit not unfamiliar to Eric, who has spent the better part of his life finding the quickest ways to earn a living.

  His trading vasdy improved in just the last few years, and that success has garnered him attention on social media, where he’s often found offering positive reinforcement to newer traders. He’s an eternal optimist, although not when it comes to the prospects of companies he’s short selling, and admits to having a “very large gamble” in him.

  He’s on pace to earn over $1 million in trading profits this year.

  What first got you interested in trading?

  During the 1997 to 2000 dot-com craze, when things were getting a bit nutty, I was amazed people could actually make money trading. Of course, I didn’t have a damn clue, but I took a shot here and there. I

  40 The Gambler

  made a few, lost a few, but eventually strayed away from it because it was too scary for me. Too scary to give up a steady paycheck and rely solely on trading with 8- and 9-year-old children at home.

  What did you do for money in the meantime?

  I bartended the whole time. At rave clubs. I’d work from 9 or 10 p.m.

  until 5 a.m. and make $300 to $400 a night. In a weekend I could make $1,000 to $1,200 for three nights worth of work. I was a hard-working bartender. I wasn’t the guy in Vegas flipping bottles and putting on a show, but I would put out numbers, selling $2,000 in liquor a night. I certainly didn’t want to be the guy who worked on the corner at a Cheers type bar making 80 bucks a shift. For me it was always about spending minimal time making maximum money.

  So when did you come back to the market and become the trader we’ve come to know?

  Well from ‘02 to ‘08 I was in property investment with a partner I met through a fellow bartender. I was always careful with money and had a pretty penny saved up. Long story short, we killed it for six or seven years. I mean, we weren’t big players, but we were each making anywhere from $70K to $120K a year. You can live like a king in Florida on that kind of money. But around ‘06 and ‘07, I could see things topping out. Everybody and their brother was either a realtor, flipping houses, or a mortgage broker. My partner, who was extremely well educated, asked me to join him on a new business venture, but it would require 60 to 70 hours a week. Well I was having major problems in my marriage at that time, looking after my kids nearly full-time, so I wasn’t willing to put in those hours. I turned toward the market looking for a way to make money and sort of fell back into trading. I started dabbling in my E*Trade account playing penny stocks and thought maybe I’d get lucky, maybe I’d be able to make trading a life for myself. Which was a ridiculous thought at the time, of course, but that’s what I was thinking.

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  What year was this?

  Around 07 to 08. I got boiler room calls and mailers sent to me pumping penny stocks, and I bought some! Here I was, a middle class guy who had saved up about $200K, busy looking after his kids, and decides to put $50K into a very illiquid penny stock, TSHO. I bought 200K shares at 25 cents a share, then went and played some golf and looked at investment properties. Soon the stock was trading at 75 cents and I was up $100K. I thought, wow, this isn’t rocket science, not knowing that it could crash at any moment, of course. So around $1.01 per share, I liquidated half my position for $75K profit. It kept climbing to around $1.50 a share, where I could have sold the other half for another $50K, but I didn’t. It crashed for the next three days, and I liquidated all the way down to 51 cents while it was trading very thin, making it difficult to fill orders. I was very naïve at the time and wanted to understand what just happened. That’s when I stumbled upon Tim Sykes on the Yahoo! message boards. He was explaining the short side of pump and dumps. I signed up for his service and realized there was a way to make money on the downside of these plays and actually understand them.

  And you’ve been trading successfully ever since?

  Yep, since ‘07. And I’ve never been unprofitable. But I attribute at least the first two years when I was longing stocks to luck. When the market came apart in '09,1 bought Ford at $2 and LVS at $7.

  Great buys. So you were buying more than just penny stocks at the time…

  Absolutely. I would hold positions for longer, too. I sold LVS in the high $20s and it went to $60 the next year. I scaled ou
t of Ford in the $7s and $8s. I wouldn’t even consider holding positions like that today.

  But back then it was part of my repertoire because I was so naïve, so green. It just felt like the right thing to do because these huge companies were so cheap. And it worked.

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  From such a naive start how did you transform into the trader you are today? How did you educate yourself ?

  Mostly the Internet and chat rooms. And within those chat rooms I found a few good friends who became mentors. People that didn’t even know how much they were schooling me. And I also sat in front of the computer for eight hours a day learning charts, watching Level II, and not knowing how to pull the trigger. I was basically lost for a few years vet somehow profitable, believe it or not.

  It is amazing that you were profitable through all that. Most people naively buying pump and dumps don’t come out ahead.

  I don’t want new traders to be discouraged if they don’t have a lot of money, but I think the key to my profitability in the beginning was that I did have money. It was never scary for me to risk some downside.

  So would you advise new traders to save up a large chunk of capital before they start?

  Yes, because I see it happen all the tune. Guys message me who have doubled their $5K account to $10K in seven or eight successful trades but wipe it all out with one bad trade. I can’t believe how hard it must be to start with $5K. Not everyone can be Tim Grittani. As a matter of fact, I would say it must be damn near impossible. Why not build a base of $25K to $40K before jumping in? And begin with some serious rules about your money. But if you absolutely can’t help yourself and you want to start with a small amount, you should swing trade with traders like Michelle Koenig in Investors Underground chat.

  Build slowly.

  Do you trade alone?

  I traded with someone on Skype for about six months He constantly yelled at me: you’re too aggressive, you have too much size, you’re not paying yourself on dips. It was a nightmare.

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  Your approaches were different…

  Our styles were very different. He seemed very pessimistic, whereas I m very optimistic. Not to mention I have a very large gamble in me. If I get upside down in a trade, the last thing I want to hear is “eat the loss. WTiat I want is helpful guidance, someone to help me make a better decision based on my rules, someone to help get my head back in the game, not someone to tell me exactly what to do. I love to trade alone. You’ll never find another person who trades exactly like you.

  But you do have trading friends who you interact with daily?

  Absolutely. When that person is struggling in a trade, you want to pick them up. Because we all know what it feels like to crash emotionally when it comes to trading. It’s very heavy. But if you can deal with those moments and push through, it will bring you to where you need to be. That pain is growth, unless you let that pain bury you.

  Learn from your mistakes…

  Yeah. But the pain is so overwhelming I have sat on my bed after trading, head in my hands, thinking, I’m going to ruin my family, I’m going to ruin it all. It’s a scary, scary place to be, but that pain is what you need in order to understand the mistakes you’ve made.

  I’ve been there. I share the gambling tendencies you speak of…

  And we’ll never lose those tendencies. I’m a gambler by nature. Even when I know I have the second-best hand, I’ll still give action. We can’t stop it. It’s very, very difficult for a gambler to eat a loss. And of course that’s when losses compound, which is terrible, but it’s also that gambling nature that allows me to tackle trading again the next day.

  Get right back on the horse…

  You’re damn right.

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  Do you handle anyone else’s money?

  Absolutely not. I wouldn’t manage one dollar of another human being’s money for fear of losing 50 cents of it.

  What’s your daily routine while trading?

  At night I go through Nate’s scan and Michelle’s scan, both from Investors Underground. Then I look at other stocks that aren’t as liquid or stocks that Nate just doesn’t bother with. So now I have a watchlist prepared. By 7 a.m. the next day I’m already checking to see if there’s any activity in those stock. I’m ready to trade. I also look for stocks moving on earnings or any other news. I want to trade at 7 a.m.

  By 9:30 a.m. I’ve drank a pot of coffee and smoked six or seven cigarettes out on the porch, and I’m ready to go. Although I wear my bathrobe until noon, (laughs) But by the time the opening bell rings, I probably know at what price I’m going to pull the trigger on a few different trades.

  Can you give an example?

  Say AAL is up 50 cents in pre-market trading, but the market itself is pretty flat, I might bet on a sharp pull back at the open and try to scalp a quick $1K there. After the open I’m popping off on three or four stocks and adding or covering by 9:45 a.m.

  So some of the trades are quick scalps but others you might add into. How do you determine which is which?

  It’s kind of a feel thing for me. Remember MNKD when it was running? Every morning it would gap up and steadily grind higher the rest of the day. It all seemed very orderly. Well on the morning it tanked, the price action was all over the chart. It felt very unstable. I took a huge short position right at open and added as it tanked. Guys ask me what my trigger was or where the trend broke, but it’s more of a feeling. I don’t know. I don’t mean to be vague, but that’s what it is.

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  When the market closes, are you done trading?

  I can be done when the market closes about three days a week, which are the days I go to the gym. But usually I’ll make at least one mistake each day, a trade that I’ll fight all day long that I didn’t take off at 3:59

  p.m. because I want to fight it again the next day. And that’s only if I don’t fear a catalyst moving the stock overnight. But when I hold something over I’ll stay at the computer until 4:30 or 4:45 p.m. just to make sure there’s no unusual activity.

  What’s your trading desk look like?

  I have three 30” monitors and about to have more soon. But I’m a litde old school when it comes to Level II and charts, because I still use Power E*Trade Pro. It’s free since I have a healthy account with them, although I never trade there anymore. But on the left-hand screen, I have Pro open with Level II and 1-min charts for about 10

  different stocks. On the middle screen I have position summaries, orders, and where to place orders for my Centerpoint Securities (ETC

  and Wedbush), Interactive Brokers, and E*Trade accounts. On the right-hand screen, I have chatrooms, and—don’t laugh—Yahoo!

  message boards, (laughs) I still do it. I know. I can’t help it. And I also have my email and maybe a couple other 1-min charts on that screen.

  Do you pick your trades solely based on technical analysis or are some based on fundamentals/news?

  I’m 50/50. I’m a fundamental news guys who uses charts. Whereas Nate might stop a short position because it’s breaking key levels to the upside, I’ll say, trash equals trash. If the fundamentals are trash, even if the stock is running, it’s still trash in the end. Now that doesn’t mean you add and add to a losing position, but you look for that top and a trend break to the downside. Then you double down. Yeah, there might be some pain involved, but what’s the endgame? Put everything in perspective. What’s my timeframe? How long can I hold a good, solid short? What’s my maximum drawdown? Should I even be short right now? But for me, trash equals trash, watch me in the end.

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  In the end you’ll be right, but you must be willing and able to hold short through large drawdowns or even possible buy-ins…

  Yeah, you have to be able to get to the Promised Land. And that can be quite a ride. But I think fundamentals will get you there 90 percent of the time if—and that’s a big “if ’ —you manage it properly. That’s the hard pa
rt.

  When you do use charts, are you using technical indicators?

  I do. But for me, more than anything, it’s just trend break. I know where support and resistance are, and I know where the breakout is, but all I need to see is a couple trend breaks, some bearish activity.

  Most guys won’t start in short because the stock is still pressing upwards, but as soon as I see the first bearish bar, I’m taking a chance on a short. And not just based on the chart. I also like to see some funny activity in the Level II montage. Some hocus pocus like bid propping and the like. I’m always speculating as to what that action means, but I think they’re maneuvering and trying to manipulate the weak retail trader’s mind. I too can be fooled, but I want to be on the side of the professional, don’t you? That’s when I start taking real risk.

  Can you give an example of the “hocus pocus”?

  JRJC had a big run up to $11.90 before Citron Research hit the stock with a negative article and it dumped down to around $10.40s by the end of the day. The next morning, when it ramped back up again to around $10.80, there was wild activity in the quotes on Level II. There was a massive offer of 300K to 400K shares at $10.80 or $10.81. But right below, at $10.79, there was a steady bid eating everything that was thrown at it. I was talking with another trader at the time and told him someone was taking a massive short position at 10.80, we should get in front of their short and fill everything we can at $10.79. He wasn’t so sure, but I filled about 75K short at $10.79 before, all of a sudden, there was a giant red bar in my favor.

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  How did you know the 400K at $10.80 wasn’t fake, a desperate short trying to show size to scare longs into selling?

  The offer was real. They were on both sides in my opinion. They knew they couldn’t fill a short position of that magnitude without “buying their own short.” They supported the bid until they had the size short they wanted, knowing that after they sold that long, taking a little loss on it, the price would crash and they’d make it up 10-fold on the short side. As soon as that 400K filled on JRJC, they pulled the steady bid and market sold the whole long position and it dropped from $10.80