Momo Traders

by Brady Dahl

  So you’ll do a starter position of 2,500 shares on a trade you want 15K shares total?

  Yeah.

  And then you’ll add on a higher low. How many shares do you add on that first add?

  I’ll just double my position. I’ll add another 2500 shares.

  And by “breakout point,” you’re talking about a technical breakout, right?

  Yes, and I’ll double my position there. I’ll double the position to 10K

  shares long. If I’m right, usually the stock will shoot up before coming back down to test that breakout point once more. And that’s where I’ll gauge whether or not I want to add even more to the position. Most of the time I won’t, because I’m already in full size. But if I like the trade, and I like the risk to reward on the stock, I’ll add again. I’ll add up to four times total. That’s just the way I trade.

  What about on the short side?

  When I’m shorting into a parabolic and I think a top is coming, I don’t go in full size immediately. Same as when I go long, I’ll start with 2,500

  shares short. If the stock keeps going, I’ll short another 2,500 shares.

  If keeps going again, I won’t add any more. I’ll wait until that lower high shows up on the chart before adding to full size with stop on the

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  prior top. People tend to add, add, add all the way up into parabolic moves, but I have a rule, which is I won’t add twice to a parabolic.

  So you’ll take a short starter into a parabolic, but if it goes against you higher, you’ll add only once?

  Yeah, I’ll add once, but if it keeps going past that, I’ll cut it.

  Where do you cut it if it keeps going? Do you have a 10 cent stop or a percentage stop?

  Usually for me, if I’m getting stopped out, it’s a starter or half position. I’ll either stop on a whole or half dollar mark, depending on where the stock is going. It’s really rare that the stock moves that much against me. It’s usually when I’m caught adding, adding, adding, so that’s why I implemented the one-add rule. It has saved my ass countless times. If the stock moves against me $1 per share and I have 5K shares, I’m down $5K. Is that a lot of money? Yeah. But it’s not enough to take me out of the game.

  Do you use hidden orders to hide your size?

  Oh yeah, I hide my size every time. I don’t trade size without hiding.

  How do you determine your exits when a stock keeps moving in your favor? Do you have targets or do you let the chart tell you?

  I don’t have targets. Usually if it’s a breakout on the daily chart, I won’t set a target because of the potential. I left a lot of money on the table in the past because I’d be done selling my entire position by the time that first breakout move happened. Now I tend not to sell any part of the position until the first big breakout or after. I like to start selling into the second and third move of a daily chart breakout because the odds of making more money in that situation heavily outweigh the odds of losing money.

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  And when you say daily breakout, you’re looking six months or a year back to determine that the stock is making new highs above previous prices on the chart?

  Yeah. If the last highs on the chart are from only three months ago, some of the bagholders from that push are probably still in the stock and ready to sell, so it creates a lot of resistance. But if the previous highs were six months or a year ago, it’s more likely those bagholders have sold already.

  To your point of exiting into the second or third move, are you looking for it to speed up first, and then sell in increments?

  Yeah, I start selling in increments as it speeds up. But something I’ve learned is that you can be more profitable waiting to sell positions until you see lower highs on a breakout trade. The notion of selling into lower highs instead of at highs sounds ridiculous, but you can’t nail top sells on every trade. You just can’t. With a lower high you can gauge it better because the chart is showing you some weakness, instead of trying to guess the top of a breakout.

  That’s a good point. We’re always trying to guess the top.

  It’s something that took me a few days to think about because it sounded ridiculous. I started experimenting with it and watching charts that were breaking out. I would long them, sell into the pops, then realize that the first lower high was actually higher than where I sold.

  Especially if it’s a strong daily breakout like we discussed.

  Exactly.

  How long do you typically hold a trade?

  Anywhere from two minutes to three or four hours. I’d say on average it’s 20 to 45 minutes. But I’ve held positions all day before, and I’ve held positions for a minute.

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  How far do you let a starter go against you? You mentioned half and whole dollar marks. What if you enter a trade 40 cents away from a half dollar, do you still use that as a stop?

  It’s a starter for a reason. But it really depends on the trader. If I lose 40 cents with 2,500 shares, that’s a thousand bucks, so it’s not going to kill me. You have to respect your starter positions. Do not add as the trade goes against you. If you’re long, you add on higher lows. If you’re short, you add into lower highs. If you’re adding into lower lows on a long position, you’re going to get yourself into trouble. You never know how bad a loser is going to get if you’re adding on the way down. Just have a set plan. If you’re long at $11, and your risk is $1, stop out at $10. Set your plan and trade your plan. If your intention is to risk a dollar to make two dollars, risk the dollar. Even if the stock goes 50 cents against you, stick to the dollar risk because stocks have a tendency to bounce back. Yesterday I was long 55K shares CDTI and I got bored and took it off for no good reason. And you know what it did the rest of the day—squeezed up over a buck.

  Do you have a set percentage of your account you’re willing to risk on each trade or do you use a different measure?

  I don’t have a set percentage. Every once in a blue moon, if I really like the trade and know I’m going to go balls to the wall with it, I’ll decide beforehand that I’m going to risk $15K to $20K to make $40K

  to $50K. That’s 10 percent to 15 percent of my account at risk, but I’ll do that every once in a while. Although on the average trade, I’ll just risk 10 cents or 15 cents. I don’t really look at the numbers anymore because the more I look at the numbers the worse my trading gets.

  Sounds like you look for trades with a 3:1 risk to reward ratio…

  I usually look for a 2:1 ratio or higher. The winner will make up for the loser. But if I find trades I like with a 5:1 ratio, I use a lot more size and decide to risk X amount of dollars to make X amount of profit.

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  So in a 5:1 ratio trade, you decide beforehand that you think the price will move five times larger than your risk?

  Yeah, that’s what I usually do. I can give you an example. When it came out in the news that a doctor in New York had Ebola, I decided I was going to long 20K shares of APT at $4.50 flat. I told myself I would risk 10 grand to make 30 grand. Even if it only makes it to $5.50, it’s still a 2:1 trade for 20 grand profit. I ended up making $25K.

  What’s your most reliable type of trade?

  The squeeze plays we’ve discussed. They’re the most consistent. And there’s another setup I call a perk-to-resistance trade. It’s where an over-extended stock goes parabolic and you know it’s going to collapse. But the question is how high will it go first? You can’t really know for sure, and they play games with you. So you look for that previous intraday High of Day on the chart. The stock has since pulled back from that high, but now it’s climbing back up slowly, ABCD style like Nate teaches. This all comes from experience, but the play is to start shorting into that HOD break when it goes parabolic into that resistance. All of a sudden they pull the bids and the price collapses. It can be a tricky trade.

  Right, because other traders might be longing that action for a breakout. But y
ou’re saying they basically “stuff it” into the break instead of actually letting it break out?

  Yeah, exactly. And once they pull the bids, it’s going down.

  But there s really no way to know whether it’s going to break out or get stuffed. It’s more of a hunch?

  Yeah, hunch or intuition type play, because you’re watching the Level II quote montage and letting it speak for itself.

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  What are you looking for on Level II?

  You’re looking for hidden size. That’s the key. They’re showing 100

  share lots on the offer, but you see 1K, 5K, and 10K shares being filled there. All of a sudden, that price is just absorbing all the volume being thrown at it. And you just know someone is selling huge. It can be a hunch, but seeing it just comes with experience. You learn to spot that action, and it can be a profitable trade.

  Do you have a bias towards going long or short?

  Right now I’m 50/50. Just depends on the market. Usually I just try to get on the opposite side of the popular sentiment. Sometimes the trend on a stock will be up, and then it will start moving straight up. If the short interest isn’t really high enough to support a move like that, I’ll short the hell out of that stock. The move is just a result of longs chasing it up, so you know’ it’s going to come right back down to where it started. On the other hand, on the long side, when shorts attack a stock like GPRO and the sentiment is suddenly negative, there’s no way vou can short those dips. Usually you should buy those dips because eventually it stops dipping when there are no shorts left to attack, and it often comes right back up and starts squeezing.

  How do you determine it’s a short attack?

  It’s a stock you’re familiar with that has tons of short interest, like GPRO. And the price is breaking trend where you know shorts will pile on. All of a sudden the price gets clobbered, and you know people are shorting it “in the hole” late and other shorts will want to cover into the pull, so chances are the stock will go right back up to where it started falling.

  It seems you’ve been trading less lately yet making more money.

  I’ll trade one to three stocks per day. I don’t do more than that because I’ll get confused. You have to watch the montages on the stocks you trade to see what games are being played.

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  So you generally watch every tick during a trade?

  It depends on the position. If the stock is going in my favor I try to ignore it. If you pay attention to every little thing and every person who is buying or selling, it can frustrate you out of a good position.

  Of course I’ll always keep an eye on it, but I try to ignore the noise.

  That reminds me of “trade your plan”. Don’t let the noise influence you…

  It's usually the quick scalp trades where I really must focus and watch Level II. When a stock is going down quickly and I’m trying to buy dips for a scalp long, or when a stock is going parabolic and I’m trying to short it, those are the ones I have to really focus on. But when I’m building a position into a trendline, I try to ignore the trade as much as possible because that trendline can go for an hour or two before it decides which way it wants to go. If you’re sitting there staring at it the whole time, you’re just going to get frustrated with the trade.

  How big are your positions usually?

  It depends on the stock. I try not to let one trade determine more than half of my buying power. So if I have $150K in the account and my buying power is 4:1,1 try not to put over $300K into one position.

  How big of an account do you trade?

  Suretrader has about $50K. Wedbush at Centerpoint has about $150K.

  ETC at Centerpoint has about $115K. So roughly $300K to $350K in my trading accounts.

  Do you have a rule where you wire out if an account gets over a certain amount?

  I tend to wire out on a hot streak, because a hot streak either ends with you taking your money out or a trade taking your money back.

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  And you're typically flat at night, right?

  I’ll take one position, maybe two positions every two or three nights for a gapper. But the gap has to be highly likely, otherwise I won’t take it. I like to be cash at night because I like to sleep.

  Do you watch your profit and losses during the day?

  I try not to focus on it. The more I focus on it, the worse my trading gets. If I’m up $15K intraday, I might get ballsy and say I’m going to risk $5K on this trade when I normally wouldn’t. You can get yourself into trouble that way. Just take it trade by trade.

  Do you use hard stops?

  No, because the algorithms just mess with them. If you have a hard stop at $10 per share, the algorithms know there’s going to be a lot of stop losses there, especially because it’s a double digit whole number.

  They’ll intentionally hit those stops to sell positions. That’s why I like to give myself a little wiggle room.

  I think “wiggle room” is where a lot of new traders have problems because how do you know they’re just taking out stops? If you’re short a stock and your stop is at $10 per share, the price might spike to $10.07 or $10.10 before falling back…

  Set your stop at $10.13 or $10.14 and hold to your stop. I do think you have to give yourself some more room due to the algorithms, but you have to be very disciplined with that. If it goes $10.20 or $10.30 and you still haven’t stopped out, you’re going to get caught adding to a loser. You don’t want to be in that position. Newer traders should probably use hard stops, but more experienced traders should not.

  Do you have set amount of profit you’d like to make each day?

  No.

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  Do you have a maximum amount you’re willing to lose before you quit for the day?

  Usually about $10K.

  How much attention do you pay to the overall market or economy? Does it play into your trade decisions on a daily basis?

  Just the S&P 500. I like to watch that while I'm trading big boy stocks like FB, TWTR, TSLA or GPRO. Usually the S&P 500 doesn’t really matter when trading other stuff like low float stocks.

  What’s your biggest win?

  My biggest win is APT. It was a $40K profit.

  What happened?

  Well, you know the whole thing I said about not adding, adding, adding into parabolics? I did just that. APT gapped down huge in the morning and then ripped back up pretty nicely. I started shorting in the $9s, then $9.50s, and then $10s. Before I knew it, my broker cut my buying power when I had 60K shares at a $10.00 flat average. At this point APT was trading in the $10.60s, so I was down around $35K. But then that perk-to-resistance play started happening. They just started stuffing the hell out of it. It went right back down to $10.00 and I was even. But I decided to hold for a bit. It ran back up to $ 10.20s, then started sinking back down. It put in lower highs and all of a sudden we got the $9.50s flush. That’s when I started covering.

  I ended up covering the last batch of shares around $7.40 that day for total profit of $40K and change.

  And by “they” you’re referring to the funds running the stock?

  If I tell you I know there was a fund behind APT, I’d be lying because I don’t know there was a fund behind it.

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  Right, but we all suspect it…

  The type of moves it did, there’s definitely a fund behind it. There’s no way a stock gaps down 40 percent and then goes green on the day without someone behind it.

  So basically you had a 1:1 risk on the APT trade. You were down $35K and ended up making $40K.

  (laughs) Yeah, I guess so. I didn’t really like that one. I got caught with my pants down. My best trade to date, but the risk on that was crazy.

  How big of an account were you trading then?

  My account held $21 OK, so I was down like 17 percent of the account.

  What were your emotions like?

  Honestly, I al
most broke one of my screens. I was really mad, and I asked myself, how can this keep going? When you put yourself in the position to ask yourself that, you know you’re in a sketchy situation.

  You should be cutting your losses. The only thing I had in my favor was the trend line. And risking on the prior top. You can look at the daily chart and see there was about a 20 cent difference.

  The current price was 20 cents away from the prior top where you would have stopped out?

  No, it went 20 cents over the previous top.

  There's that ‘*wiggle room.” So where would you have cut it off ?

  You don’t know, do you…

  My broker would have probably covered me at $11. I wouldn’t have blown my account, but at the same time they wouldn’t have liked that risk. They already cut my buying power that day. I had nearly a million in buying power to start, but they cut it to $750K, so I feel like they

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  would have covered my position around $11. I think I was about 20

  cents away from having my broker cover the position for what would have been my largest loss to date.

  What is your largest loss?

  KATE. A $23K loss. I got caught trying to buy the dip on Aug. 12, the day it collapsed. It fell from $42, and I started long 500 shares at $32. I kept buying the dips and somehow ended up with 20K shares at about a $31.50 average. It sunk to $30.50 before I finally cut the loss. It was a big hit, but it fell to $27 after that, so I would have blown my Suretrader account that day had I not cut the loss.

  So you were making the mistake of adding on lows…

  Exactly. That’s what I was doing. It’s an example of why you shouldn’t do it. Have I gotten better about it? Yes. But I could be caught doing it tomorrow. You have to respect your plan, that’s all you have to do to survive this market. If you don’t respect your plan, good luck to you.

  How did you come back from the loss?